The barrage of media reports on mortgage loan defaults and the tightening of credit have created an atmosphere of apprehension for potential home buyers and homeowners who want to refinance their home loans.
First, consumers wonder if they even can qualify for a loan and, if so, under what terms. Then they wonder if the loan and the lender will still be in business when settlement day rolls around.
Local lenders and mortgage brokers share these concerns. Their primary advice to all potential borrowers is to stay in constant communication with the lender, particularly as the settlement date nears.
“As a mortgage broker, I deal with several different lenders, and, on any given day, their programs and guidelines change almost hourly,” says Jason Klein, president of City Line Mortgage in Bethesda.
Mr. Klein says that conforming loans (loans for less than $417,000) that are backed by the Federal Home Loan Mortgage Corp. (Freddie Mac) and Fannie Mae, normally are readily available to borrowers with good credit and assets. Jumbo loans, which are for amounts greater than $417,000, are more difficult to obtain. In the Washington real estate market, many homes are priced above the conforming loan limit.
“There’s not really a market for investors to purchase mortgage loans not backed by Fannie Mae or Freddie Mac,” Mr. Klein says. “There’s a major pullback on the loose credit that had become common in the past four or five years. For jumbo loans, borrowers need to realize that interest rates have been raised above the rates for conforming loans by as much as 1 percent, so this will make it harder to qualify.”
Mr. Klein says lenders of jumbo loans have raised their standards so that borrowers need to have higher credit scores, higher incomes and larger down payments, and they need to demonstrate that they have larger reserve funds than in the past.
Char-Lee Smith, a mortgage consultant with the Smith-Pagnotta Team of First Horizon Home Loans in Vienna, says: “Consumers need to be very aware of the changes in loan products and understand that what’s available right now might not be there when they are ready to close. The guidelines for no-documentation loans, stated-income loans and 100 percent financing have tightened so that they are becoming much more difficult to obtain.”
Mr. Klein says Bank of America used to offer “stated income” loans, those in which no paperwork was required to prove the claimed income of the borrowers, but the company recently eliminated that entire line of loan products.
Mrs. Smith says borrowers should meet with an experienced mortgage consultant from an established company and be prepared with a back-up plan in case the loan program for which they are preapproved disappears.
“The tightening credit mainly affects subprime borrowers who needed an adjustable rate mortgage to qualify or a no-documentation loan because of income issues,” Mrs. Smith says. “Buyers who are credit-qualified and are applying for a full documentation loan should be fine.”
Mr. Klein recently worked with first-time buyers who had been preapproved for an 80-20 loan, meaning a first mortgage for 80 percent of the home value and a second-trust loan for 20 percent of the home value. The couple had good credit and income, but this particular loan program had been discontinued, so they needed to come up with a down payment of 5 percent in order to purchase the home.
“No-down-payment products have almost completely dried up,” Mr. Klein says.
Mrs. Smith says that though consumers should not anticipate a return to the days when a 20 percent down payment was mandatory in order to purchase a home, they should realize that loan products with limited down payments will require a higher credit score than in the past.
Glen Lazovick, director of mortgage lending for Mid-Atlantic Federal Credit Union in Germantown, says consumers need “very good credit, a score of 700 or higher, in order to qualify for the few 100 percent financing products which are still available. These loans also require full documentation to prove the availability of income and assets.”
Mr. Lazovick says that although there are no guarantees in the current mortgage market that a particular loan program will stay available for the weeks between the time a consumer obtains a loan preapproval and goes to settlement, working with a reputable lender can help.
“It’s important in this market to not try to find the cheapest guy in town, but to work with a lender who will be there at the table at closing,” Mr. Lazovick says. “If you are taking a while to look for a home, keep in touch with your lender the entire time.”
Mr. Lazovick says that to prepare for a loan application, consumers first should make a budget for themselves to determine how much they can afford, not forgetting the additional money that will be needed for maintenance.
“People need to be very realistic about what they are comfortable spending,” Mr. Lazovick says. “If they have no other debt at all, it’s not unreasonable to spend 30 [percent] to 40 percent of their income on housing costs. But if they do have other debt, they need to keep their housing costs closer to 30 percent.”
Mr. Lazovick recommends that people think carefully about what they are willing to give up and what they are not willing to forgo in order to own a home.
“My favorite example is skiing,” Mr. Lazovick says. “People need to think about how much they spend on skiing. If they are not willing to give up skiing, they need to make sure that their budget has room for several ski trips in addition to their housing costs and other debt payments.”
After developing a budget, consumers should go to a lender to determine how much they can afford to spend on a home by calculating their potential down payment and loan program. Consumers can streamline the process for the loan application by coming to the lender meeting prepared with the necessary paperwork.
Mr. Lazovick says borrowers should bring all the statements for the most recent two months of all assets, including retirement funds, stocks, bonds, mutual funds, checking and savings accounts. Because many people bank online, it may take extra time to pull together paper statements for these accounts.
Additional required paperwork includes two years of W-2 statements; pay stubs for 30 days of income; two years of taxes for self-employed individuals; two years of a job history, including the address of employers; and two years of residential addresses and landlord information.
“Consumers should go first to a lender to analyze their individual situation,” Mr. Klein says. “They may need to start saving for a larger down payment or find ways to improve their credit score.”
In recent years, most borrowers chose loan programs that helped them avoid paying private mortgage insurance (PMI), which consumers pay for though it protects the lender in case of a loan default. These programs also are less commonly available. PMI normally is required when a home purchaser pays less than 20 percent as a down payment on a home.
“People avoided PMI by using both a first and second trust to buy a home, but fewer banks are offering second-trust loans today,” Mr. Klein says. “PMI will be much more prevalent than in the past.”
Also recently, consumers have opted to shop around for the best interest rate or loan program. Lenders do not recommend this practice in today’s volatile mortgage market.
“Every loan program changes a little here and a little there, but most will be within the same parameter,” Mrs. Smith says. “It’s much more important right now for consumers to find a trustworthy mortgage consultant who will make sure your loan will be funded at the settlement.”
Mrs. Smith also recommends working with an experienced lender who can educate and coach potential borrowers to restructure their finances to improve their credit score, an important element to qualifying for a loan.
“Consumers should pull their credit reports way ahead of time, since it can take time to repair credit problems and to improve the score,” says Mr. Lazovick. “Lenders can plug in several scenarios to model what steps will work best to improve someone’s credit, such as paying off one credit card totally or paying down several accounts.”
Mr. Klein suggests that consumers should be prepared to wait six to 12 months before buying a home in order to improve their credit score and to save money for a down payment.
While the most basic method for raising a credit score is to pay all bills on time and maintain a low balance on all credit cards, there are additional steps consumers can take to improve their credit rating.
Some home buyers are pressuring sellers and lenders to set a quick settlement date in order to forestall any problems with a loan program being discontinued.
“Some banks are cutting off loan products but will finish them out by a certain date, so buyers are sometimes scrambling to push up the closing date,” Mr. Klein says. “While that works sometimes, borrowers should always stay in constant touch with their lender to make sure their loan preapproval is still in place. When someone is getting ready to write a contract for a house, they should stay in touch daily.”
Buyers may have an advantage in today’s real estate market because there is an abundance of homes for sale in the Washington area, but they need to be prepared with a good credit rating, and savings for a down payment and cash reserves before applying for a mortgage loan.
boost your credit score
m Check all three credit reports (from Experian, Equifax and TransUnion) to find out your score and to review all the details. Clean up any misinformation that can hurt your score by sending a registered letter with proper identification to all three credit bureaus; lenders sometimes can expedite this process if you have documentation in hand to disprove negative reports.
• Make sure your creditors have reported payments accurately. Some are late to report a payoff.
• Check to see that the information on the credit report has not been duplicated, which can increase your apparent level of debt.
• Check your credit limit for each account and make sure your balance is less than 50 percent of the limit. If the balance is higher than that, pay down the balance on each card to reach that goal. In addition, call each creditor to ask for a limit increase.
• If you have four credit cards, one with the maximum amount of credit used and three with a zero balance, it’s best to transfer some of the debt to create a balance among the cards.
• Pay all bills on time every month.
• Have three to five lines of credit open, which can include a mortgage loan, auto loans, store credit cards, installment loans and credit cards.
• Don’t close all your accounts. Credit reporting agencies want to see a history of at least one year of on-time payments on the same card.
• Keep at least one card for as long as possible. “Old credit” boosts your score.
• Don’t open a lot of new accounts even if they offer lower interest rates. Instead, ask your existing creditors to lower your interest rate.
• If your current creditor will not raise your credit limit or reduce your interest rate, transfer the balance to a new card and close the existing account. Consumers should only do this with one account, once a year. More than that could lower your credit score.
• Limit the number of people who check your credit. Don’t shop around for a mortgage loan, auto loan or credit cards.
• Beware of companies that promise to clean up your credit for a fee. Most lenders have computer tools that can demonstrate how your credit score will change if you pay off one debt or pay down others.