Despite reports of a crisis in the mortgage-lending industry, residential loans are still available for borrowers looking to secure home ownership. In fact, with inventory high and home prices decreasing, now is a good time to buy a home.
However, with severe deterioration in certain sectors of the market, especially those that provided loans to borrowers with blemished credit, the rules of lending have changed.
Loans are available but we have seen a return to normalcy across the board. While some lenders keep conservative credit guidelines through the cycle, others loosened their standards. Today, most lenders are tightening their credit requirements.
Gone are no-income verification loans or 100 percent-financed loans. Rather, lenders are requiring that borrowers improve their credit ratings and be prepared to make a down payment of anywhere between 10 and 20 percent of the loan amount. Furthermore, lenders are requiring borrowers to provide income verification to certify that the borrower can indeed make the monthly payments required in the loan terms.
The new guidelines protect not only lenders but also borrowers who need the assurance that they are not caught in the position of being unable to pay their mortgage. This requires that borrowers take an honest look at their financial situation and work with their lenders to determine how much they can truly afford – today and tomorrow. Neither the lender nor the borrower wants to take on risk and run the possibility of defaults on mortgage payments.
With the change in lending rules, borrowers should consider the following tips when seeking out a mortgage:
1. Meet with your lender and become more informed – visit your personal banker to identify what is required to secure a mortgage and whether or not you qualify and can realistically live up to the terms of the loan. Ask friends and family for recommendations of lenders with whom they have had good experiences. Be sure and reach out to your bank. They already know and value your relationship.
2. Be prepared – realistically look at your finances to determine how much house and mortgage you can afford. Be prepared to back-up your determination with documentation proving your income and assets.
3. Improve your credit rating – Contact the credit reporting agencies to obtain a copy of your credit report. You can get one free credit report each year from each of the reporting agencies. This will provide you with the same information the lender will have about you and enable you to identify and rectify any potential problems. If there are errors on your report, resolve them as quickly as possible. Next, pay down credit card debt as best you can and always pay your bills on time. Lenders want to be assured that you are not a credit risk. The better your credit rating, the better your odds of qualifying for a mortgage at the lowest possible rate.
4. Prepare to make a down-payment and borrow less – Depending on your credit rating, lenders may require you to put down anywhere from 10 to 30 percent of the purchase price.
While the rules of residential lending are changing, and will continue to change, consumers should not be scared off by the current credit crisis. Loans are available from banks and other local lenders, who are seeing a rise in loan applications. Now may be the ideal time for credit-worthy consumers to buy the house of their dreams.
Debbie Layer is the market president for the West Coast of Florida with Bank United Financial Corp.
