What's it take to get a home loan?
Even with all those cheap, empty homes for sale, credit is very tight. Here's what it takes to get financing.
This post comes from Marilyn Lewis of MSN Money.
At bargain prices these days, why aren't more people buying homes?
Is it because everyone is scared? For sure, plenty of people are watching the dropping home values and imploding mortgages, saying, "Buy a house? Heck no. I'm safe and happy being a renter, thank you."
And they're probably right. For them.
As we all know by this point, the decision to buy a home is a highly individual thing. For a big chunk of the population, renting makes more sense. The boom made everyone feel like a fool not to buy, regardless of whether you were employed, had savings, intended to stay in town, stay married or had the slightest interest in home maintenance.
Like Jonestown converts around the vat of Kool-Aid, we did what everyone else did.
So, the newly sane are sitting this one out. Good for them.
Still, that leaves what must be a fair number of people with stable jobs and savings, and who intend to stay put for five or 10 years. You need as little as 3.5% down for an FHA loan. Why aren't more of these people buying?
Are they waiting? If so, you can see their logic. Post continues after video.
- Prices are still dropping. Analysts predict that, nationally, they could fall another 10% or so before settling down in summer (and we all know how accurate analysts have been).
- If you put 5% down to buy a place today and it loses 10% of its value, you'll be 5% "underwater" before prices rise again. That's not including closing costs ($2,300 to $4,000, though these days you often can get the seller to pay some of that), plus other move-in expenses.
MSN Real Estate lists the top reasons why people are scared to buy these days, based on research by the Home Buying Institute:
- 37% worried about ending up with a mortgage payment that's too large.
- 23% feared they might pay more for a home than it's worth.
- 16% were afraid of losing their jobs after taking on a mortgage loan.
- 10% were concerned about buying a home with major structural problems.
- 5% were afraid of choosing the wrong type of mortgage loan.
- 5% feared another housing bubble-and-bust cycle.
And yet, while being underwater by 5% is no fun, it's not a terrible thing if:
- That's all the further it goes.
- You've got money in the bank and love the place anyway.
- You won't need to sell.
- Or you can bear selling at a loss.
So, buying while prices still are declining isn't insurmountable, for some.
Can you get credit?
What about credit? Can you get a home loan if you need it?
John Burns, a homebuilder consultant in Irvine, Calif., told The Wall Street Journal recently: "There are just not a lot of renters with confidence, with a down payment, with good credit, and without a lot of additional debt."
Things have tightened up considerably since the days when anyone with a pulse could get a home loan. Lenders, too, are chastened and scared.
They've become so conservative that they've gone overboard. As Bloomberg puts it, "... lenders toughen their standards for Federal Housing Administration-insured loans beyond what the agency itself requires."
With lender fears in the driver's seat, what exactly does it take to get a home loan now?
In 2006, a FICO score of 620 would have done you just fine, according to Kelli Grant of SmartMoney. And FHA didn't even have minimum credit score requirements.
Oh, my, how things have changed.
Now, FHA requires at least a 500 score for a mortgage. And if you want to put just 5% down, you need a score of 580. (Here are the FHA rules.)
But that's the ideal case. In reality, FHA just provides the insurance to cover the lender in case a borrower defaults. It's the banks that issue the loans. Their rules are becoming even stiffer. You may be able to meet the FHA requirements but still be unable to find a loan.
Wells Fargo and Bank of America, two of the largest mortgage lenders, now require minimum credit scores of 640 on FHA loans (used in a fifth of U.S. home purchases).
"People who should be getting credit can't get it," Ron Phipps, president of the National Association of Realtors, told Bloomberg.
Other stuff matters
Your ability to get a loan depends not just on your credit score but on a combination of factors, including your:
- Loan-to-value ratio (the smaller your loan in relation to your home's value, the cheaper your mortgage; if you borrow more than 80% of the purchase price, you'll be required to buy mortgage insurance).
- Credit score.
- Down payment size.
- Outstanding loans and bills (home expenses should be no more than 28% of your gross monthly income).
Your credit score is a huge piece of it. Real estate columnist Ilyce Glink advises MSN Real Estate: "To get the best interest rate and deals on home mortgages, you need to have a great credit score (above 760, and sometimes above 780), you need to have a stable employment history and you usually need to have at least enough money to put down 20% toward the purchase of a home."
Glink says that although you might get an FHA loan with just 5% down, you'll get a better interest rate with 20% down.
Barry Zigas, director of housing policy for the Consumer Federation of America, and John Ulzheimer, founder of 2StepCredit.com, told Bankrate.com how lenders weigh these factors:
"Below 660 or 680, you're either going to have to pay sizable fees or a higher down payment," Zigas says. And that's pretty much the cutoff score for getting a mortgage, (Zigas) says.
On the other end, a score of 700 to 720 will get you a good deal and 750 and above will garner the best rates on the market, Ulzheimer says.
The way things are going, it's probably going to get even tougher, Bloomberg reports: "In spite of differences between Democrats and Republicans on reforming housing finance, both sides back proposals that would make mortgages more expensive and difficult to obtain."
Which means that, if you're really someone who should be buying, now might be the time to start thinking seriously about it.
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