Getting a Mortgage in Challenging Times

In the wake of the tidal wave of bad news that has hit the mortgage market, there's a profound new lending landscape.  The good news is that you can still get a mortgage.  The bad news is that money will be harder to borrow, particularly if you have bad credit.

All it takes is one little measly economic meltdown to send credit standards through the roof.  In the wake of the federal takeover of Fannie Mae, Freddie Mac, and insurance giant AIG, the financial world is walking on eggshells.  

While many banks have been following smart lending practices and haven't felt the fallout from the subprime lending crisis, all lenders seem to have tightened their belts.  Credit standards are stricter, and income documentation is an absolute must.  Welcome to the new world of home mortgages.

More money down

If you've ever heard people talking about the days when 20 percent down was required to buy a new home, prepare yourself for a trip down memory lane.  Gone are the days of 0 percent down.  Now, the absolute bare minimum is 5 percent down, but only if you have sparkling credit.  Otherwise, down payments are running anywhere from 10 to 30 percent.  An FHA mortgage, which has always allowed low down payments, has increased its minimum from 3 percent to 3.5 percent.

Credit standards rising

When you hear about how higher credit scores are now required, you wonder why lower scores were ever tolerated in the first place.  The answer is a mixture of greed and politics, but that's old news.  What's new is that the typical credit score requirements for most conventional loans is a minimum of 620.  Requirements for an FHA mortgage has jumped, too, and now stand at about 580.

Saying no to no income documentation

Not too long ago, lenders conceived a brilliant plan for self-employed professionals.  Because so many of them don't show high salaries on their tax returns, it's always been difficult to qualify these people for a conventional loan.  To work around the problem, lenders created the "no-doc" loan, in which borrowers simply had to state their income.  They incurred a higher payment, but at least they could acquire the loan.

The problem was that too many self-employed people couldn't afford their payments. It turns out that their "stated" income was an overstatement.  Lenders have tightened the guidelines and now have the same requirement for self-employed individuals as they do for people who are salaried employees.

Young people in search of a home may not be shocked by the new lending restrictions.  They'll have no historic perspective regarding how easy borrowing money used to be just before the real estate bubble burst.  Unfortunately, the lax credit standards of the past two decades have come back to haunt us.  Now is the time to abide by the new lending guidelines, and to treat credit wisely.  It's the only way we can prevent this painful episode from happening again.