Getting Mortgage In Tight Market
No doubt you've heard that the mortgage market is in trouble. Many investors are losing money, and many homeowners could lose their homes to foreclosure. If you're trying to buy a house or refinance a mortgage, Early Show financial guru Ray Martin offers words of wisdom to boost your chances of being approved.
The End of the Mortgage Party
Over the past decade, as the rate of homeownership surged, it was the best of times for folks in the mortgage business and the home buyers who borrowed their money. The talk at backyard cookouts and parties was about low interest rates, easy-to-get mortgages and rising real estate prices. As the saying goes, every party ends and, the later the night, the longer the hangover.
The mortgage party is ending harshly for many in the business. As mortgage lenders originate loans, they package them into mortgage-backed securities and sell them to investors such as insurers, banks and pension funds. But as these investors took note of the rising rate of defaults on some of the loans in their portfolios, they abruptly shut down their buying of most mortgage-backed securities, and the mortgage lending companies found that the rules of the game had changed almost overnight.
So far this year, more than 80 mortgage lenders, ranging from small, local mortgage brokers employing just 50 people to American Home Mortgage, the Melville, N.Y.-based lender that announced it is no longer taking loan applications and laid off 6,500 employees, have restricted the terms for loans they will accept, stopped taking new loans altogether, or simply closed their doors. In August alone, home loan companies have cut over 25,000 jobs.
Most of the mortgage lenders impacted were heavily engaged in "subprime" mortgages, adjustable rate mortgages offered to people with lower credit scores who have little, if any money for a down payment.
All was well as long as the folks who took out these loans could make their monthly payments. But after the Federal Reserve Board increased interest rates and the housing marked slowed, many of those folks found that, as their ARM payments increased, one of their escape routes --selling the home quickly - was cut off. And now, while still struggling with a mortgage they can no longer afford, the other escape rout - refinancing the mortgage - is no longer an option for many.
There are many reports in the media of folks with good credit, but unconventional financial situations, being rejected for mortgages as they find fewer mortgage choices than even a few months ago. Mortgage brokers, who had an array of mortgage products to lend to almost any type of borrower, are complaining that they no longer have products that can meet the needs of their customers. Some of my contacts in the mortgage broker industry say they have not seen the credit environment this bad in their 20-plus years in the business.
With the ending of the mortgage party, the bottom line is this: For many people who would have coasted through a refinance or a home purchase earlier this year, there is a new reality. More folks who seek to take out a new mortgage or refinance an existing one will be faced with higher interest rates and tougher requirements on everything from down payments and appraisals to credit scores and financial documentation.
Here is what you need to know if you are looking to enter the mortgage market this year:
Make Increased Down Payment:: Today, more lenders are no longer offering loans that exceed 90 percent of the appraised value of the home. So, if you want to buy a home, you should expect to put down at least 10 percent of the purchase price to get a reasonable mortgage.
Provide Full Documentation: Expect to submit full documentation of income and cash you have in the bank with your mortgage application. These requirements will include three months of pay statements and at least two years of tax returns. You'll also need to provide at least three months of bank account statements that shows that the down payment has been in your bank account for at least that long.
Increase Credit Score: It is now more important than ever that you review your credit score and take steps to improve it before you apply for a mortgage. According to some mortgage brokers, when loose mortgage loan requirements were the norm, they could almost always find a loan for folks with credit scores in the low 600s. Now, many are reporting that credit scores need to be at least above 680, or even 700 to make a loan application work. With the median credit score standing at about 720, this doesn't seem to be a large problem, until you consider that over 42 percent of folks have credit scores below 700.
Avoid "Jumbos": The interest rates have risen significantly on the upper-end of the mortgage market. Rates for the so-called jumbo mortgages -- those that exceed the $417,000 amount that is eligible for purchase and guarantee by mortgage institutions Fannie Mae and Freddie Mac -- are almost two percentage points higher than rates for loans below this limit. That means that the monthly payment for a $418,000 mortgage versus one just $1,000 lower, or for $417,000, would differ by over $500 per month! Borrowers who need to borrow over this limit should consider two loans - one at the $417,000 limit, and another, smaller loan, such as a home equity loan on which the interest rate is linked to the prime lending rate. This advice, of course, assumes that the total of both loans is affordable and does not exceed 80 percent of the appraised value of the home.
Shop Several Mortgage Brokers: With the rapidly changing mortgage marketplace, the options available can vary widely from one mortgage broker to the next. There is clearly a shakeout in the market, and only those with strong backing of large lenders or with good contracts with Fannie Mae or Freddie Mac will have the best options during this period of change and uncertainty.
Finally, while no one in the industry can say when conditions will improve, all agree that the fast and loose mortgage products offered at the beginning of this decade are not likely to be seen again for a long time.