"Borrowers are going to have to prove they are the borrower they say they are," says Keith Gumbinger, vice president of HSH Associates, a mortgage-industry publisher in Pompton Plains, N.J. Imagine that, having to actually prove that you can afford the loan - the nerve of these guys!
Gumbinger says home buyers should consider these things before they apply for a loan.
1. Down payments are critical. Borrowers should expect to put down at least 10 percent for a “conforming loan” – a mortgage that Fannie Mae and Freddie Mac will purchase. First time buyers will still get a break and only have to put 5% down with some lenders. FHA borrowers will see the down payment go up from 3% minimum to 3.5%.
2. Credit scores count. A 720 on the 850-point FICO rating scale will get a borrower access to the best rates. Rich Bira, branch manager of FCM Direct Lender in Chicago, says: "A score between 720 and 739 gets 0.125 percent added to the rate, a score between 700 and 719 gets 0.375 percent added to the rate, and a score between 680 and 699 gets 0.5 percent added to the rate.” FHA has raised its credit score minimum from 600 to 620 and even then you'll end up paying 1-2 points on the loan up front, just to get a loan. Conventional borrowers at the low end of the credit score scale can just about count on paying 3-4 points, too.
3. Consider VA and FHA. Borrowers without down payments or with less than stellar credit scores should consider these government-insured loans offered through the Federal Housing Administration of the Veterans Administration. Even these programs have tightened up and raised both down payment and credit score requirements. there is also the USDA Rural Development program, but that program is rumored to be low or out of funds right now.
4. Unearth the records. Before applying, borrowers should organize tax, banking and other records that prove income, savings and debts. They should also expect to be patient about what may seem to be endless requests for information. This is a good time of the year to go find records anyway, with tax season upon us. Be sure to save at least 2-3 months worth of pay stubs, credit card bills and other documentation. You should probably get a letter from your employer that states how long you have worked there, too.
5. Get rid of debts. Limiting debts, including what borrowers expect to pay for the mortgage, to less than 43 percent of gross income (called the back-end ratio by lenders) has historically been important. The new back-end ration for most lenders is now at 41% of the borrowers gross income. That means that your total current monthly debt payments for things like cars, credit cards and any other installment-payments-oriented debt should not exceed 41% of your gross (not net) monthly pay. You don't have to cancel all of your credit cards (in fact that would look bad on the credit report), just get them paid off.
Now if you're a regular Joe who has been consistently keeping your finances in order and have been making your payments on your home and everything else, you may wonder what all of the fuss is about. Well it was a combination of lenders willing to lend to unqualified borrowers and borrowers buying homes that were well above their means that got us into the current housing market meltdown and foreclosure mess. Had these rules been in affect and been actually followed for the last few years we likely would not have had at least the housing industry collapse that lead to the current economic downturn. We may have still seen credit issues leading to a crisis (many believe that a credit card debt meltdown is next on the recession agenda), but housing would have been in better shape and some of the banks that have failed because of bad mortgage debt might have survived.
Some of the content in this post first appeared in Chicago Tribune, in an article written by Mary Umberger, published 02/15/09.
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