Mortgage market: a scary new world

USA Today (Society for the Advancement of Education), Jan, 2008

If you are thinking about moving or refinancing in the coming months, it would be wise to make a plan now for how you will approach lenders. The current debacle in the subprime mortgage market has made all lenders somewhat skittish about future business and, while getting a loan will be possible for most borrowers with acceptable credit, it makes sense to make yourself attractive as a borrower while anticipating fees and conditions you might face, suggests the Financial Planning Institute, Denver, Colo.

Get some advice. Given changing mortgage conditions, it probably makes sense to see how mortgage debt fits into your overall financial picture. You might consider meeting with a financial planner to review how much of a loan you can afford based on your own financial circumstances. If buying a new home, bring your agent or lawyer into the loan discussion--they not only may have good contacts, they may help negotiate a better deal.

Clean up your credit. A good credit report always is essential in a lending process, but even more critical now. Various reports say that lenders want credit scores that are at least 10 to 20 points higher than standards for various loans only six months ago. Things may stabilize early this year, but do not count on it. Remember, you have the right to a free credit report annually from each of the major credit rating agencies--Experian, TransUnion, and Equifax--but order them (they are available from www.annualcreditrepert.com) at staggered times throughout the year so you can catch potential errors as they occur and have the firms make the proper adjustments.

Cut revolving debt. When the holidays roll around again, resolve not only to curb spending, but to attack credit card debt. A large amount of unsecured debt is a negative on mortgage applications, so even if you cannot eliminate it all, make sure those balances get considerably smaller before you apply. Keep in mind that credit scores generally are higher for those who borrow 30% or less of their credit limit on any revolving account.

Be prepared for larger downpayments. Current borrowers have been getting a shock after applying--in certain cases, lenders have been coming back to them demanding larger downpayments in order to qualify for the loan they want. The days of less than five percent down on private loans may be scarce for a while--10% and up may be more common in the future. The best loans still come when putting 20% or more down.

Do not ignore fees. One of the things a real estate attorney can help with is a closer understanding of mortgage fees and the reality of how they can change by closing. This is very important because you will be deluged in paper once the process starts. There is not, nor has there ever been, a mortgage with "no closing costs" Lenders--whether mortgage banks, credit unions, or mortgage brokers---are in the business to make money, and you need to understand exactly how they plan to make it. Do not be surprised if mortgage lenders make up some of the profit from slowing real estate sales in higher fees or charges. Be aggressive about questioning fees, and do not be afraid to walk away from a lender who will not explain them or adjust fees that clearly are onerous.

Be willing to settle for a smaller property. One of the realities of the tougher mortgage market is that lenders will not be enabling many borrowers to go into larger homes than they can afford. Unless you have a lot of downpayment money and great credit, it might be time for a reality check. Lenders who gleefully told borrowers six months ago that they could spend up to 50% of their pretax income on a monthly mortgage payment now are pushing for 40% or less.

If you are self-employed: It never has been terribly easy for self-employed people to get credit, but get used to more of a hassle when applying today. The market for low- or no-documentation loans is getting tighter. This is why it particularly is important for people who cannot verify income to have spotless credit.