Pinpoint the right type of loan for you

By Charles Scutt Content That Works Features
Article Launched: 02/01/2008 10:02:51 AM PST
Mercurynews.com

Thinking about buying a new home but suffering from pre-borrowing anxiety? Despite the subprime mortgage meltdown, tighter lending restrictions and widening foreclosure fears, the American dream of home ownership still is attainable so long as you know what to expect in the current mortgage loan climate.

The good news, according to Michael LaCour-Little, a finance professor at California State University-Fullerton, is that most borrowers those with good credit and some down payment or significant housing equity should not have difficulty obtaining financing today. It s the no-money-down loans to borrowers with weak credit that will be very hard to come by.

Elisa Mullins, a broker and owner of Assist-2-Sell Premier Realty in St. Louis, Mo., says that the average borrower can weather the current financing storm, especially if she or he has good credit, which typically equates to a credit score of 680 or higher.

They have the opportunity to be in the driver s seat and take a proactive approach toward their future to include buying into the American dream, Mullins says. The credit-worthiness of the borrower will secure favorable financing in today's market. That will open the buyer to a lot of different mortgage products that are not available to credit-risky borrowers.

Nevertheless, today s borrowers will have to prove that they can repay a loan without any problems, says Gavin Susman, COO of Sky Development, Inc. in Florida. They will have to abide by Fannie Mae's guidelines for debt-to-income ratios utilizing documented income. Gone are the days where you could get away with providing a letter from your employer stating how much you make.

Instead, you'll need to provide pay stubs with W-2 forms or tax returns, Susman says. If your income is not documented and you have bad credit, you will not be able to secure any mortgage unless you are financing no more than 70 percent of the value of the property, he says. Even then, you may have a hard time getting the loan.

Additionally, you can anticipate having to pay higher interest rates nowadays if you seek a non-conforming loan one exceeding $417,000 says LaCour-Little.

What s more, says Mullins, you should expect to have around 5 to 10 percent of the purchase price saved. If you cannot get the seller to credit the pre-paids and closing costs, then you will need to have an adequate down payment, the amount of which is contingent on your creditworthiness.

With lenders adding more restrictions, be prepared to pay more in borrowing fees as well, says Mullins. With fewer lenders out there today than in years past, it makes it more competitive among lenders. The fees will go up naturally as a result.

On a side note, while there may be fewer lenders, greater loan availability may be on the horizon, says LaCour-Little, thanks to the recent Federal Reserve cut in interest rates. However, even though the rate cut is likely to produce greater liquidity in the mortgage market, the rate cut itself is not likely to reduce most mortgage rates, since they tend to be tied to longer-term rates rather than the federal funds rate that the Federal Reserve controls, he says.

When mulling over your mortgage-loan options, it s important to scrutinize several key criteria, says Scott Christiansen, a senior mortgage professional with WestCal Mortgage Corp. in Southern California.

Consider your income today vs. income in the future, he says. Look at potential tax breaks, and spread out your investments the amount of money you put into your home vs. other investment vehicles. Work with a mortgage professional who comes recommended and whom you trust. Lastly, do your homework and take action. Times change, and so do financing programs, so what is available this week may not be next week.

Doing your homework inevitably involves checking your credit score and analyzing your credit report carefully, says LaCour-Little. If you do identify any problems, try to resolve them before applying for a loan.

Though they ve gotten a lot of bad press lately, don't be too quick to dismiss adjustable-rate mortgage options, says Christiansen.

ARMs are still a great option for the informed borrower, he says. ARMs are designed to fit a borrower s time line and payment range. If you're going to live in a home for three to five years, look at a five- to seven-year ARM. If you plan on living in a home for 20 years, and you elect to go with a five- or seven-year ARM, then you run the risk of the rate being higher at the adjustment period. Many lenders and borrowers went about the last few years as if the housing market could do nothing but grow. There are always adjustments, corrections and changes, and all should be considered when selecting the best mortgage-financing solution.

If you get turned down by a lender, don't despair, says Mullins.

This is a sign of the times - a good sign, she says. Lenders are finally putting in some safeguards to help buyers recognize when they should not be buying. Get the tools you need to clean up your credit and other personal situations before you decide to take on any debt you can t afford.

LaCour-Little says that approximately 20 to 30 percent of mortgage-loan applications are declined each year. It s not the end of the world, he says. Different lenders have different underwriting guidelines, so you may simply need to apply to another lender.

Ultimately, remember that banks make money lending money, says Christiansen. The days of a real estate investor coming in without a job, with terrible credit and almost no money in the bank and buying homes and apartments may very well be over. But smart money is still available to smart borrowers.