Debt Free

If you’ve been anywhere in the world with a radio, TV or Internet access, you’re by now aware that there has been a bit of an adjustment in the mortgage market over the past few months. As some of you have personally discovered, just having a pulse does no longer a qualified creditor make. Mortgage lenders have gotten leery of the funny business, due to a record number of defaults. Their investors have followed suit, much as they did in the Internet bubble of 7 years ago.

Funny, both of these events had one thing in common; a terribly flawed business model. With the e-commerce bubble it was the “gain market share at the expense of anything resembling profit” business plan; all the while buying $50,000 granite water features and custom carpet with the corporate logo for the lobby of the hopelessly large offices. With the sub prime mortgage fiasco it was the “Just loan money and let appreciation sort everything out” mindset that proved to be the industry’s undoing. Okay, now that everyone is on the same page, repeat after me “Our business model has to be self sustaining and show long term profit potential, without rewriting the rules, in order to be valid.” Got that? Great!

Now that most of the calamity has befallen us, there are still many people out there who’d actually like to buy a home. Lenders and their investors are so jittery, they’ve forgotten that many people actually will repay their loans. These prospective borrowers are earning a decent living, have equity in their homes, and aren’t leveraged to the hilt in other areas. These are well qualified buyers and represent pretty good credit risks, all things considered.

If this is you, you’re probably wondering just how in the heck you’re supposed to get a mortgage these days. I have a few friends with houses on the market right now, and they report that, while many people would like to fork over the required price to buy their home, many are unable to actually get a mortgage to do so, even though they seem qualified.

Here’s what mortgage lenders are looking for these days in order to let one of these precious mortgages slip through their fingers. You’ll be hard pressed to get a mortgage with a credit score much below 650. If you can get one, you’ll pay a pretty penny. You’ll probably not be able to get a no down payment loan, either. Be prepared to have a down payment of at least 10% for a conforming loan from most lenders. The exception would be someone who has a very nice sized down payment, such as in the 25 – 30 % range. Credit would be less of an issue for these borrowers. Remember, $417,000 is the maximum loan amount purchased by Fannie Mae. Loans above that amount are classified as ‘Jumbo Loans’ and are more difficult to get. Lenders are usually not loaning any more than 80% of the home’s value for these loans.

For God’s sake, stay away from ARMs. Have y’all learned nothing? As we speak there is little to be gained by going with an ARM. Bankrate.com reports that there’s about a 0.2% spread between a 30 year fixed rate mortgage and a 5/1 ARM. Last week there was basically no difference at all. So, for right now, stay with the security provided by a fixed interest rate mortgage.

Despite what’s been so widely reported, it’s still possible to get a mortgage for the majority of people. Lenders are just being more cautious and you may have to look a bit more thoroughly in order to find a loan, but they are still out there, so don’t’ give up just yet. It’s more critical now than ever to make sure your credit score is all it can be, and that you have all your ducks in a row.