The housing bust isn't just slashing home values and jamming the financial system, it's constricting the supply of mortgage credit as well. Although 30-year fixed mortgage rates remain attractive, banks are jacking up lending standards and inserting additional hurdles into the home loan process. As a result, some would-be borrowers will face higher rates, while others will be turned down altogether.
But that doesn't mean you can't get a mortgage, says Keith Gumbinger, vice president of HSH Associates. "Mortgage money is available," Gumbinger says. "In order to have access to the financing, however, you are going to have to align yourself more closely with the new, more prudent lending standards." Amid higher delinquencies on home loans, banks have ditched many of the breezy credit practices that helped inflate the housing bubble. "The days of giving loans to anybody with a pulse are behind us," says Mike Larson, an analyst with Weiss Research. As a result, today's prospective mortgage borrowers will have to meet a more stringent set of requirements than consumers faced just a few years back.
These requirements include:
1. Solid Credit. Prospective borrowers will need a FICO score of roughly 720 or above to obtain the most favorable mortgage rates, Gumbinger says.
2. A Down Payment. Nearly all lenders will want borrowers to make some form of down payment to qualify for a loan. The size of the down payment will vary but will be at least 3.5 percent, Gumbinger says.
3. Income Documentation. Loan applicants will also be required in most cases to provide document verification of their income and their assets.
While these requirements may not seem onerous to those who got loans before the housing boom, they represent a significant departure from the easy credit standards of the first half of the decade. For consumers looking to find the best possible deal in today's mortgage market, experts provided five specific tips:
1. Shop Around. Because the credit crisis has affected different banks in different ways, the streams of credit available in today's market are extremely divergent. "There are lenders who didn't get involved in subprime lending," Gumbinger says. Such firms "are in a very good position to make you a loan at a lower markup over their cost of money." That means it's more important than ever for consumers to shop around to see which financial institutions can offer you the best deal. "Don't forget to look at small thrifts, small banks, [and] credit unions—these are guys that didn't play in the [high-risk] lending arena and aren't suffering as badly," Gumbinger says.
2. Save for a Down Payment. Given the current credit environment, consumers will have to put their "financial house in order before [they] buy a real house," Larson says. That means if you don't have enough cash for a down payment, you'll have to start saving for one. "Cash is becoming much more important than ever," says Tom Vanderwell, a mortgage lender and author of the forthcoming book Straight Talk About Mortgages: How to Survive and Thrive in Today's New Mortgage World. "Not only from the standpoint of having money to put down—because the days of the zero downs are gone—but also from the standpoint of not being flat-out broke at the time that you are closing the mortgage."
3. Check Your Credit Report. It's important to make sure that your credit report—which lenders will be using to determine whether or not to give you a loan—is accurate. "I would recommend going to at least one of the three major credit bureaus and...get[ting] a copy of your credit report," Vanderwell says. If you see any mistakes, "get those inaccuracies taken care of," he says.
4. Pay Down Debts. If you want to get a mortgage but have substantial debts, consider paying them down. "The lower your debt load is against your income, the more willing a lender is going to be to come work with you—because you are not overleveraged," Gumbinger says.
5. Been Late? Wait. If you have a recent delinquency on your credit report, you're probably better off waiting a couple of months before applying for a loan, Larson says. "Keep in mind that your credit score is going to depend in part on how long it has been since your last delinquency," Larson says. So if you have a recent blemish on your report, "it may behoove you to wait a few months, maybe even six months or a year...to get that stuff further back in your credit history, and then there is the possibility of qualifying for a better rate," he says.