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Getting a mortgage today; What does it take? April 24, 2008

Posted by shaferfinancial in Uncategorized.
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Fannie Mae has now eliminated its stated income program.  This has happened on the heels of most lenders getting rid (at least temporarily) of their alternative programs which allowed stated income loans.  But just as you think this program is dead, a couple of lenders has started to bring back its alternative programs with stated income loans.  This makes perfect sense because stated income loans were not the problem above a certain credit score.  So if you have credit scores above 680, there are now stated income programs for you.

Now here is the kicker, and really the crux of the problem.  Required loan to values have gone down and this is especially acute with the stated income programs.  Expect to have to put at least 15% down for stated income programs.  And if you are in a market with declining values add another 5% to that.

Finally, some sense is starting to settle into the mortgage market.  When you look at the foreclosure rates it is really the 95%-100% loan to value loans that are causing the majority of problems.  Variable rate loans are not, repeat not, causing the majority of problems unless they are connected to high loan to values.  Stated income loans for folks with high credit scores are not causing the problems.  And especially SIVA programs (stated income, verified assets) are doing just fine.

But of course that makes sense.  Past behavior is a great predictor of future behavior and those with a history of paying their bills on time tend to continue that behavior.  Those that have savings and other assets tend to be in better position to handle problems like job layoffs, sickness, etc.

So as equilibrium comes back into the mortgage market, here are four things you need to have in order to get a loan.  Savings, enough to put down a 10% down payment.  Even though there are still some programs that allow you to put down less, by putting down 10% you have shown the ability to save and be fiscally responsible which puts you into a lower risk category and makes loans cheaper.  And credit.  Check your credit report.  Make sure it is accurate.  Go through the process of getting the agencies to make corrections on inaccurate information now because it takes time and energy to accomplish.  Pay off outstanding debts (except medical), even though this might temporarily suppress scores.  FHA will make you do it anyway if you want a loan from them.  Fannie Mae now puts a surcharge on folks with mediocre scores.  Get them up past 700.  And retirement funds.  Start the 401K at work.  Once again to an underwriter if you have both savings for a down payment and some retirement funds you are a much better risk.  Finally, start a relationship with a mortgage planner.  One that is willing to tell you the truth, one that thinks like a financial planner and insists on you getting your personal finance house in order first.

This used to be the way it was.  The banks and lenders got away from that and it has cost them big time.  It has created a real estate market that has its worst boom and bust ever.  Don’t expect it to go back to the way it was anytime soon.  But of course, this is the way it should have always been.  Buying a house is critical to one’s financial health, but not every one is ready for this major liability.  Get ready and then make the move!

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