It's a changed world for those seeking mortgages
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And now for the scary part: getting a mortgage.
The mortgage industry has been in turmoil since last summer, with dozens of lenders out of business, eligibility requirements and loan fees jacked up, and now, the stunning takeover of industry giants
What happens next is unclear. But if you've come this far - trudged to all those open houses, endured unexpected bidding wars, and finally got what you're looking for - buck up for the final sprint.
First the good news. The federal takeover prompted an immediate drop in mortgage rates, with 30-year loans now well below 6 percent from many lenders. Moreover, federal legislation has expanded the availability of home loans; buyers can now borrow more money before being hit with higher rates associated with jumbo loans, and first-timers are eligible for a $7,500 tax credit. And many of the junky loans that got so many borrowers into trouble earlier this decade no longer exist.
"If you have good credit and you saved and you have job stability, there is plenty of money out there and the rates are good," said John Battaglia, president of the Cambridge Mortgage Group in Hingham.
Even so, borrowers should prepare for a rigorous scrubbing before receiving a high quality loan. Get your paperwork in order. Have two years of W-2 forms, as well as pay stubs. If you are self employed, expect to show two years of tax returns and assets statements.
The biggest issue most borrowers will encounter is new lending qualifications many mortgage firms put in place after the collapse of the subprime market led to a wider shortage of credit. With the government takeover, new rules on eligibility, credit score requirements, loan size, and fees may be back on the table.
"The tightening of the credit guidelines is dramatic," said Brian Koss, managing director of Mortgage Network in Danvers. "We don't know if in fact when the government is directly involved whether it will loosen things up."
Here are some things to think about:
Your credit score may be your most important asset. A FICO credit score, which shows lenders your credit history, can range from 300 to 850. Brokers say a score of 720 and higher qualifies a buyer for the best rates. Most buyers would need a 660 or above to get conventional financing. Below that, buyers should consider a loan backed by the Federal Housing Administration, which has less stringent guidelines.
Borrowers can request copies of credit reports and scores from the three nationwide consumer reporting companies,
"Credit score is the first thing we need to know to quote a rate," Battaglia said. "People need to pay attention if they are first-time buyers - they should understand what their credit looks like and make sure they stay on top of their payments."
Most lenders require a hefty down payment. Borrowers should be ready to put down at least 5 or 10 percent for most conventional loans. At 20 percent down, a buyer can avoid paying private mortgage insurance, which can cost several hundreds of dollars a month. Loans backed by the Federal Housing Administration will require at least a 3.5 percent down payment beginning in October.
MassHousing approves mortgages with no down payment for people with good credit (720 or higher).
"We believe if you focus on someone who has good credit and the ability to pay, down payment is less important," said Peter Milewski, director of MassHousing's Mortgage Insurance Fund. "We encourage people with no money down to look at something they would be comfortable living in for 5, 10, 15 years. If you only want to live some place a year or two, 100 percent financing won't make sense."
Borrow what you can afford. The old maxim was borrowers should pay no more than one third of their income toward housing. The ratio is calculated in two ways: One includes the housing portion of a borrower's debt and the second adds other monthly expenses such as car payments and credit card debt. For the latter calculation lenders once allowed debt-to-income ratios to be as high as 55 or 60 percent, or up to three-fifths of a borrower's income; now generally want the overall debt ratio to stay closer to 40 percent. For housing-related debt alone, lenders are requiring that a borrower's costs be about a third of their income and no more.
"The first thing you should think about is what you think you can afford, not what the bank thinks you can afford," Milewski said. "We tell borrowers to trust their own judgment."
Not a perfect borrower? Take a look at FHA loans: Many borrowers seeking FHA loans are refinancing from adjustable rates that are about to be reset. The federally backed loans allow for smaller down payment from borrowers with less-than-perfect credit. Expect to pay a mortgage insurance fee. Borrowers seeking what are known as "jumbo loans," or more than $523,750 in Suffolk County, need not apply.
You can borrow more. Congress has expanded the limits of so-called conventional or conforming loans from $417,000 in certain markets, bringing a lower rate than jumbo loans. These new so-called conforming jumbo loans begin at $417,000 and can go as high as $729,750, with the ceiling in the Boston area set at $523,750. Those who still need to go above those limits should expect to put 20 percent down for jumbo loans, and have 700 or better credit scores, plus expect to pay rates of at least three quarters of a percent higher than a conforming loan.
Tax credit for first-time homebuyers. Buyers who purchase homes through April 1, 2009, can qualify for a tax credit of up to $7,500.
Refinancing. Many Massachusetts homeowners who bought property since 2005 will find their homes no longer worth what they paid for them, making refinancing largely impossible. Those who do have equity in their homes may want to reconsider refinancing should rates fall even lower.
"The question is how low is it going to go," asked John T. Mechem, spokesman for the Mortgage Bankers Association. "You may see at least in the short-term rates jumping around a little bit."
Mechem added that potential borrowers should not let one loan rejection stop them. Lenders look at the whole picture of a borrower - so someone with bad credit and more of a down payment can get a chance or vice versa.
"Talk to a bunch of different lenders, play them off against each other," Mechem said. "Don't go into the first place and take that deal."
Jenifer McKim can be reached at jmckim@globe.com
