Could you pay cash for a home? Not many people can. Thankfully, we have mortgages at our disposal to make such a hefty purchase. But we're all painfully aware of problems in the mortgage industry these days. What does this mean for your planned house purchase?
How did we get here?
For a time, some lenders were making loans they shouldn't have made. I'll give you a hypothetical example: If someone with a shaky credit history applies for a loan; and his monthly payments on that loan represent 50 percent of his monthly income; and those payments have a good chance of going up after one year; you might guess that loan application stands little chance of being approved. Unfortunately, lenders were approving applicants like that and others when it should have been obvious the borrowers were getting in over their heads.
Many of those homebuyers couldn't keep up with their payments, foreclosures mounted, and some lenders themselves declared bankruptcy. This scenario unfolded in the subprime market first. Subprime loans are mortgages for borrowers who have poor credit history or other factors that make the loans less desirable than those for the best-qualified buyers.
Because problems in the subprime lending industry grew, the pendulum has been swinging away from approving many subprime borrowers, especially those on the more questionable end of the spectrum. In fact, a recent survey by the Federal Reserve shows that more than half of banks have strengthened their standards for subprime loans.
Effects beyond the subprime market
Subprime borrowers are not the only homebuyers who might find it more difficult to get a loan. That same Federal Reserve survey reports that about 14 percent of banks have made their lending standards more stringent for prime borrowers. Also, 40 percent of banks have toughened their lending practices for non-traditional loans like interest-only mortgages. Borrowers are finding that some lenders are requiring larger down payments, higher credit scores, and asking for additional verification of income.
What does that mean for homebuyers?
Though it may sound like a difficult time to get a mortgage, it may help to put the situation into perspective. For starters, lenders are still making home loans. Yes, most are reluctant to lend money to the riskiest borrowers-people who probably qualified a few months ago-but qualified buyers can still get the go-ahead for a mortgage.
You should start the mortgage process well in advance of when you plan to make an offer on a home. Your Realtor can help you sort through the process of understanding various types of mortgages and what might work best for you.
Also, keep in mind that interest rates are still low by historical comparison. Rates on a 30-year fixed-rate mortgage have reached into the double digits in the past; now you can find a 30-year fixed-rate mortgage around six to seven percent, depending on your finances, down payment and credit situation.
What about a little help?
Even with tighter lending practices, first-time homebuyers and those who need some help to afford a home may still qualify for assistance. Organizations like the Texas Department of Housing and Community Affairs, the Texas Veterans Land Board, and Fannie Mae offer programs that qualified homebuyers can use to qualify for lower interest rates or a low down payment. Again, your Realtor can explain how these programs work.
Don't get discouraged by news stories of subprime lending woes. Give yourself plenty of time, research your options, and you can find a mortgage to help you buy a home of your own.
For more information, I invite you to visit http://www.texasrealestate.com/ or http://www.har.com/ and for all of your Pearland TX and Northern Brazoria and Galveston County real estate needs, please visit my site at http://www.danfrankrealty.com. Danny Frank is a local Pearland Real Estate expert.
This column was published in the 11May08 edition of the Galveston County Daily News.