Resource Guide and News
Getting a Mortgage During These Difficult Times
The economy is in recession. Banks are failing. Credit is tightening. The housing market has taken a dive. Prospective home purchasers are salivating as they are finding that properties that were once unaffordable only twelve months ago are now within reach. In some real estate markets home prices have plunged more than 40%. So why has it become so much harder to buy a home?
The reason is that the current credit crisis, which has ravaged the banking system, has forced almost every bank (at least the ones that still exist) to dramatically alter their lending policies. For the most part, the days of No Income No Asset loans are over. Zero percent down for that second home?? History. The days of easy money are gone as the entire banking industry attempts to make systemic changes to the way banks do business.
So what does the hard-working American with a good credit score and respectable savings do if he's looking to become a homeowner in today's stingy credit market? The answer is to keep doing more of the same. It's true that the credit market is tightening, but banks are in the business of making loans. If you're in good financial health, you should still be able to obtain a home loan at a very competitive interest rate. Here is a fail-safe way to get a mortgage:
- Excellent Credit.
- To obtain the most favorable mortgage rates, prospective borrowers will need a FICO score of at least 720 or above. If your credit is less than stellar, lenders will either reject your loan application or offer a loan at a much higher interest rate (if they offer a loan at all these days). If that's the case then your best option is to get a copy of your credit report. First, check to see if it's accurate. If it's not accurate then contact the credit reporting agencies and make an effort to ensure that your credit report is corrected. If it is correct, and you really do have bad credit, your best bet is to wait it out. Improve your credit score by paying off your debts, consolidating your loans, and by making sure that delinquent accounts are paid up to date. By lowering your debt to income ratio you will also improve your chances of qualifying for a home loan. It can take three to twelve months before you see your credit score rise, so don't be discouraged.
- A 20% Down Payment.
- Nearly all lenders will require some form of down payment to qualify for a loan. Although a smaller downpayment may be required for some FHA loans, a standard conventional loan with a competitive interest rate can easily be obtained if borrowers make a larger downpayment. Take the extra time to save for a larger downpayment. The more you put down, the better your rates are likely to be and the more likely a bank will give you a mortgage. While you're saving for the downpayment, make sure you set aside enough cash for closing expenses which can equal up to 5% of the cost of the home you intend to purchase.
- Income Documentation.
- Today very few banks offer undocumented loans. If you have a good work history and a decent salary it should not be a problem to get a home loan, assuming that it's a home that you can afford, you have a good credit score, and you are able to make a solid downpayment. Just be prepared to prove your income and assets. Lenders will want to see bank statements, W-2s, 401K statements, money market account statements, employee pay stubs, etc.,. Once you find out what you can afford to buy using a mortgage calculator (which can easily be found online), figure out whether you have enough set aside for a downpayment and then obtain a pre-qualification letter from a bank. Once you've done that you're ready to make an offer.
These days, it may take a lot longer to qualify for an affordable mortgage. However, buyers should not be discouraged. Stricter lending practices will mean that the home you are ultimately able to buy will become more affordable for you to own over your lifetime. With higher downpayments, buyers will be forced to have more equity in their homes. That means loan amounts will be lower, which translates into lower monthly principle and interest payments. With more equity in their homes, it also means that buyers face a lower risk of foreclosure. That in turn contributes to stability in market prices, which in turn contributes to consumer and investor confidence. If you thought credit was hard to come by, trying looking for consumer confidence.