Securing Financing in 2008

By: Tim McLaughlin     

     With stabilizing housing prices, relatively low interest rates and a good selection of properties to choose from, the biggest potential huddle a borrower will face in today’s market is financing options.

     Financing has become the single most important factor for home buyers and sellers. We have seen scenarios where borrowers were preapproved for loans with 0% to 10% down payments. But as they moved toward closing they were told that, due to changes in lending requirements, they would need to put 5%, 10% or even 20% down to gain approval.

     Lenders (and mortgage insurance companies) are changing their guidelines daily (literally) and made them much more restrictive. If potential borrowers show a preapproval from say one or two months ago, it may be (and probably is) no longer valid.

     To many, it is like it is the 1980s all over again -> you had to discuss four things: job stability, cash, credit and income. All four had to make sense for a loan to work. Here's what it takes to get approved for a loan in this current market environment.

A Healthy Credit Score

     The bar for what's considered a healthy score is decidedly higher today. “To be a successful borrower today at the best possible rate available, you have to have a FICO score of at least 700 or 720," says Keith Gumbinger, vice president of mortgage research firm HSH Associates.

     Earlier this year, Fannie Mae and Freddie Mac issued a directive requiring lenders to adjust loan pricing by 0.50% to 2.75% of a loan's value based on a borrower's credit score. This makes boosting your credit score even more imperative. FHA/VA loans can still get down to a level of 580 at some points, but even that may be short lived.

A Sizable Down Payment

     Forget about 100% financing. Today, even a 5% down payment may be insufficient, especially if you live in a declining market and your DCS is lower than acceptable. That's because mortgage insurers have stopped insuring loans for 100% financing (and less, in a lot of cases), 

     If you're buying a condo, be ready to put down even more. In many cases, condo buyers today are not only required to put down as much as 20%, but often have to prove they have enough money in the bank to cover three to six months' worth of living expenses. 

Flawless Documentation

     Even people with perfect credit are required to submit documentation detailing every aspect of their financial lives, from their income to the dollars and cents in their bank accounts. So-called stated-income-stated-asset loans, where borrowers weren't required to verify their income, assets and other financials, are now history, no matter how perfect your credit. 

For more Market News click here