How Will Mortgage Market Mayhem Affect You?

The hemorrhaging of the subprime mortgage industry is the news of the year, but only a small percentage of consumers directly participate in these kinds of special loans. All of us will feel the financial aftershocks, however, when we apply for other mainstream mortgage products.

Subprime mortgage troubles are severe, but defaults in the subprime sector only represent about one percent of the residential mortgage market. Many Americans don't pay much attention to the sensational news of historic subprime losses, because few of us actually have a subprime loan. Unfortunately, the problems have quickly spread to the rest of the mortgage industry. Nowadays anyone trying to buy a home, refinance a mortgage, or take out a home equity loan will encounter stricter policies and guidelines. The rules haven't really changed; they're just being enforced more vigilantly.

A whole new mortgage world

Here are a few of the challenges that you might face if you're shopping for a mortgage:

Jumbo loans have gotten much more expensive, while subprime loans are virtually extinct.

When you state your income, you'll be expected to prove it beyond a shadow of a doubt. Lenders used to ask for your most recent tax return, for example, but now they're more inclined to ask for two years of tax returns.

If you have a steady job in a high salary industry, the mortgage lender might still check to see what the average salary and the recent history of layoffs in that particular profession happens to be, before they approve your loan.

Banks are looking at the lowest credit rating between spouses. They're also occasionally ordering two real estate appraisals and using the lowest one to determine how much your home is actually worth.

Taking the lowest appraisal could limit the amount you can borrow to buy a home. If you're a seller, you might have to take less for your house in order to ensure that your buyer gets mortgage approval.

More conservative appraisals may also limit the amount you can borrow when you refinance, or the amount you're allowed to borrow with a home improvement loan or home equity line of credit.

Good credit prevails

Changes in lending practices are important to all of us-no matter what kind of mortgage instrument we need-because they make the application process more stringent and the availability of funds scarcer. On the other hand, if you have good credit and a solid income, you're going to be highly sought after by lenders who are struggling to make profitable loans. That preferred status will serve you well if you make the effort to shop around for the cheapest rate, the most convenient terms, and the best customer service. After all, if you maintained your excellent payment history through good times and bad, you deserve to be courted by competing lenders before signing on the dotted line-and you will be.