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home mortgage hints
By Russell Hobgood
Home Mortgage Hints When Refinancing
or Purchasing Your New Home
Currently home buyers are experiencing a true buyers’ market. Lots of houses are for sale, partly due to the downturn in the economy . The average number of days on the market is steadily increasing in all but a few market segments in the nation for those homeowners. Interest rates are probably as low as we’ll ever see again in our lifetimes. The down-side is that lending has tightened up to a point where it has gotten extremely tough to get approved for the average person. Coming off very lenient lending for the past several years has catapulted the mortgage industry into a tailspin , largely thanks to the sub-prime woes. The underwriting standards previously used for prime borrowers started being applied to subprime loans. Untold numbers of countless loans that should never have been made in the first place have gone bad and forced hundreds of mortgage company branches to go out of business and close their doors. In the recent past it had gotten ridiculously easy to qualify for a home mortgage. Depending on one’s credit scores it is common for a lender to want proof of income as part of the approval process. Until just a couple of years ago many lenders had a “Stated Income” program that was a perfect fit for many self-employed customers. Let’s say that you own a lawn-care business for example. And you have a good tax man so you don’t show much profit from the business when you have to file your taxes. Then while you’re trying to get qualified for your new mortgage you run into a “debt to income ratio ” problem (also known as DTI ) . With the “Stated Income” programs all you had to do was write out a hand-written letter stating you made “X” amount of dollars last year. (Hence the program’s name “Stated Income”) . In addition to that another folly of the mortgage industry was the misuse of the ARM’s , or Adjustable Rate Mortgage’s. Commonly used to help people afford more house than their DTI might budget for with a fixed rate mortgage, the interest rate on the average ARM would start adjusting upwards as much as 6% over the initial rate after two to five years. Now if you could barely afford your house note at the time you signed your paperwork, imagine that same payment but now with a higher interest rate . Another common denominator in a lot of these “bad loans” is the appraisal. Need a higher appraisal to make the percentages work out for the underwriter? No problem, just call a different appraiser. Lots of properties got over-appraised for more than they might should have been. Appraisals need three to four “comps” (comparable properties similar in size and structure that are nearby and have sold recently) to show justification of your home’s appraised value. One example of how appraisers might get you an inflated appraisal value for your home is for them to go a little further out away from the subject property to find higher priced homes for their comp property, maybe in a pricier subdivision. It’s no wonder that we have a record amount of foreclosures right now nationwide. Lenders are still making loans but the criteria for approval has changed considerably. The days of 100% loans, with no money down , are pretty much a thing of the past. Plan on needing a minimum of 3% down payment (and very likely 5-10%). Also you’ll need to be able to prove your income. Preferable are home-buyers who have W-2 statements for the past two years. If you’re self-employed it will be tougher because you’ll likely need two years worth of tax returns, with all your schedules. So if you’ve successfully beaten the IRS by not showing much profit it’s now going to penalize you by having a smaller net income in that DTI equation. One of the biggest changes in mortgage lending is with your acceptable minimum credit score. Most lenders are wanting a 700 score to let you play ball with them on a mortgage now. There are three main credit bureaus and home mortgage lenders usually look at all three. They are Equifax, Experian, and TransUnion. Your scores will vary slightly with the three reports but probably not with much variance. In the past “Prime” business was generally figured as a 625 or higher credit score. Lots of loans were done for people with lower scores, commonly known as “SubPrime”. Since these loans were calculated as higher risk of repayment, the lenders would be nice and extend you a loan, but at a higher rate than for a “Prime” customer. And now look where we are. If you have an adjustable rate mortgage it has probably started adjusting by now. The first increase is usually two percent over the initial rate, and can go up an additional one percent increase EVERY six months thereafter until you reach the cap (usually 6% ). And since your house may have been over-appraised two to three years ago , and now the market is soft with all the houses for sale, your value has dropped . The lender no longer goes over the appraised value for a loan amount, instead they want money down now. You don’t stand a chance to refinance because it won’t appraise for enough. And with more foreclosures it’s putting more houses on the market, and they’re selling cheap so the bank can get it’s money back. So not only do you have a lot more competition out there but now they’re cheaper too. Now your interest rate is up 2-6% higher than it was originally. You’re having trouble paying for it, and you can’t sell it either. Every time you’re late making your monthly payments your credit scores are dropping. It’s a vicious circle that way too many Americans are finding themselves in more and more every day. According to the Senate Banking Committee chair there were 8100 homes per day going into foreclosure this past April of 2008. And per the Associated Press as of September 2008 at least one in ten Americans were at least a month behind on their mortgage payments or already in foreclosure. We’re currently seeing a national phenomena of home owners “walking away” from their mortgage obligations and letting the lender have the house and property back. A voluntary surrender of their house. This hurts their credit but sometimes there is no apparent better choice. My best advice is to try and cut out the frills and make your payments on time. Look at your credit report at least once a year to see where you stand and to make sure you’re not a victim of identity theft or fraud. You can get a free copy of your credit report by going to www.freecreditreport.com or some similar website. Surprisingly paying off all your open accounts down to a zero balance isn’t always the best thing to increase your credit score. Often times it’s better to pay your card balances down, but leave about 20% or so of your high credit amount unpaid and it will raise your credit score higher than paying it all the way down to zero balance. There are multiple companies out there that will work with you as credit counselors to help you raise your scores. For the rest of us that can’t get our scores up to 680 and above it’s likely going to be for the best just to hang in there, that is IF you can weather this storm. For those of you with 680 and higher credit scores I strongly recommend going with a FHA backed mortgage. They take a fairly common sense approach to underwriting but they ARE sticklers for not wanting any reported mortgage lates on your credit history. So if you haven’t been more than one time over 30 days late on your mortgage payment in the last twelve months you’re quite possibly a candidate. 30 year mortgage rates are at a 4 year low right now. So if your credit scores are good, and if you’ve been paying your mortgage on time, and if you have equity in your home, and if the property values around you have held their own, you may want to consider refinancing your home and using some of your equity to pay off your credit card and other account balances that have much higher interest rates.
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