Can You Get a Loan?
The short answer is yes. But you need a sterling credit history to get the best rate.
Mortgages: Stricter Rules
To get a mortgage now, you'll have to make a down payment and document that you have the income and reserves to make your mortgage payment, run your household and still handle unexpected expenses.
Subprime mortgages that were offered to borrowers with questionable qualifications during the housing boom have dried up because lenders -- and the investment firms that bought the mortgages -- can no longer count on appreciating home prices to bail out bad loans. Now most lenders (and borrowers) must play by the rules of Freddie Mac and Fannie Mae, which guarantee loans meeting their criteria so that investors will want to buy them in the secondary market.
Loans backed by the Federal Housing Administration have also regained favor as an option, not just for credit-challenged borrowers (typically those with credit scores under 620) but for prime borrowers looking for low down payments.
The FHA helped Kyle and Tracy Spear of Swampscott, Mass. north of Boston, purchase a larger home with a small down payment. Last summer, the couple had planned to subdivide their property in Boston and sell the home plus a separate lot. But the city and their neighborhood nixed the subdivision, and they ended up netting just $15,000 on the sale. For two months, Kyle, 38, Tracy, 37, and their three boys -- Kyle, 4; Tyler, 2; and Jack, 11 months -- lived with friends and family to save money until they found their next home, a 2,800-square-foot house with four bedrooms that cost $540,000. They qualified for a 30-year jumbo mortgage with a fixed rate of 6.875% backed by the FHA. And because the FHA required a down payment of only 3%, they had to put down just $16,000.
Prove it. The days of "Take my word for it" are over, and stated-income loans, or so-called liar loans, are history. Lenders will ask you for at least two months of financial account statements, two years of tax returns and even verification from employers that overtime, commission or bonus income will continue.
Lenders are also scrutinizing more carefully the ratio of your debt to income. Beginning February 1, 2009, Freddie Mac is imposing a limit of 45% of all pretax income for all debt; borrowers with a credit score of 740 or
better will get the best rates. The FHA's guidelines are even more stringent: Mortgage debt may not exceed 31% of your income, and total debt can't top 43%. The FHA doesn't impose a credit-score threshold.
Loans with no down payment, or those that combine first and second mortgages, such as the 80/20, are also gone. Mortgages backed by Fannie and Freddie require a minimum down payment of 3% to 5%. The bigger your down payment and the better your credit score, the better your interest rate. If you put less than 20% down, you'll pay private mortgage insurance, or PMI. But here's the Catch-22: If home prices have been falling in your area, you may not be able to get PMI, and if you can, you'll have to ante up 10% to 15% for a down payment.
Congress has authorized the FHA, which relies on its own program of mortgage insurance, to take up the slack in declining markets, says Meg Burns, director of the FHA's Office of Single-Family Program Development. The FHA can guarantee loans up to the same amount as Fannie and Freddie. Beginning January 1, the limit is 115% of a metro area's median home price, up to $625,500, and the minimum down payment is 3.5%, up from 3% in 2008.
Mortgages are still pretty affordable. According to HSH Associates, at the beginning of November the national average rate on a 30-year fixed-rate loan was 6.4%. FHA loans had a 6.7% rate; the expanded jumbo rate was 6.8%, and the traditional jumbo rate was 7.9%. Adjustable-rate mortgages didn't offer much of an advantage: The interest rate on a 5/1 ARM was 6.4%, and on a one-year ARM it was 5.8% (although one-year ARMs have become scarce). The election may help stabilize the market, says Gumbinger, but he sees nothing to suggest that rates will go down anytime soon.
Home Equity: Lower Limits
A few years ago, home values were rising so rapidly that you could build a pile of equity practically before the ink was dry on your settlement papers -- and then borrow against it to pay for everything from home repairs to college tuition. But lenders have tightened their criteria for approving home-equity loans (in which you borrow a lump sum at a fixed interest rate) as well as home-equity lines of credit, or HELOCs, which are variable-rate deals that let you borrow money as you need it.Source: m.kiplinger.com