Ride Out the Storm With Good Credit

By Ylan Q. Mui
Washington Post Staff Writer
Saturday, August 11, 2007; D01

Financial experts are speculating that tightening credit and the volatile stock market will make it increasingly difficult for businesses to borrow money. But what effect will it all have on much smaller entities -- namely, you?

The main consequence is that the current credit crunch can make it harder for ordinary people to buy a home or refinance the one they own, particularly for those with shaky financial histories. But several industry analysts said the impact won't always be felt directly. Some argued that some consumers may not notice any changes in their finances.

Some answers to questions about the current turmoil are offered below, and the days and weeks ahead will provide more. But Greg McBride, senior financial analyst with Bankrate.com, said one thing is clear:

"The era of easy money is gone."

Q If my lender has a problem, do I have to keep paying my mortgage?

A Yes.

Though you may write your monthly checks to a particular lending institution, it probably no longer holds your loan. It bundles many mortgages and sells them to investors. So even if your lending institution were to fold, someone will still be looking for a check.

I'm thinking of buying a home. How hard will it be to get a loan?

As always, your chances of being approved depend primarily on your credit history. Those with good credit are unlikely to have problems qualifying for loans. The questions are what kind of home, and at what price. Interest rates on jumbo loans, which are those for more than $417,000, are up almost a full percentage point since May, with a sharp increase in the past two weeks. Banks are now worried about the risk of any home loan and may raise rates accordingly. They are also reluctant to offer nontraditional options, such as no-down-payment mortgages.

For people with poor credit, banks are tightening requirements and seeking more stringent income verification, experts said. They recommend that you focus on building your credit score before purchasing a house.

Already in the buying process? Keith Gumbinger, vice president of financial publisher HSH Associates, said you should ask your lender where the money for your loan is coming from. If the lender says Wall Street, ask if there is a backup plan for completing your mortgage. And steel yourself for the worst-case scenario.

"The possibility of a deal falling through in its midst is much more likely now than it was just a month ago," Gumbinger said.

I've locked in the rate on a traditional 30-year fixed-rate loan. Can I count on my payments to stay the same? What if I have an adjustable-rate mortgage?

A fixed-rate loan is no misnomer. Your monthly principal and interest payments should stay the same for the duration of your loan. However, Standard & Poor's index analyst Howard Silverblatt recommends that you keep an eye on how market changes might affect the value of your home, which in turn could affect your credit score.

The picture for adjustable-rate mortgages is less clear and depends largely on the terms of your loan: When the teaser interest rate expires, is there's a cap on the rate increase, and how often it can be reset? The first thing you should do is reread your loan documents. If you're in the third year of a seven-year ARM, you can probably ride this out.

How will the credit crunch affect real estate prices?

No one knows for sure. McBride said it could hurt housing prices over time, particularly for more expensive homes. Higher interest rates, especially on jumbo loans, mean that a buyer who once was able to afford a $500,000 home may now be able to afford only $450,000. That could cause a slowdown in the market.

Robert D. Manning, finance professor at Rochester Institute of Technology and author of "Credit Card Nation," has a darker view. He predicts that the Washington area in particular will face a 25 to 30 percent correction in housing prices. He says many homeowners may find themselves unable to sell or, perhaps, without enough cash to make it through closing.

Will I still be able to get a home-equity loan or line of credit?

If home values decline, banks will start to reduce the amount they are willing to lend as a line of credit against your equity in your house, Manning said. And because lines of credit are borrowed at adjustable interest rates, you can expect those to rise as well, he said.

But John Forman, stock market analyst for Thomson Financial, said your chances of approval depend on your credit score and the amount you want to borrow. However, home-equity loans -- the traditional second mortgage -- tend to have fixed rates, which makes them easier to get.

"If you have good credit, people will scratch and claw to lend to you," Forman said.

What about my other big debts -- car payments, student loans and my credit card?

The reason investors have been skittish about anything connected to the real estate market is that many people are defaulting on loans that they probably shouldn't have received in the first place. But that problem hasn't extended to auto loans, keeping investors happy and interest rates in place, McBride said. In addition, car loans tend to have fixed interest rates. So if you're already making payments, there shouldn't be any change.

Many student loans are backed by the government, making them low-risk investments with stable interest rates. But Manning said that the recent switch of some of those loans to adjustable rates could mean increases.

A spokeswoman for Capital One said the company is not considering changing its credit card underwriting standards and does not expect any rate increases related to the recent market turmoil. Still, Manning said he thinks banks will be forced to raise credit card rates to make up for revenue losses in mortgage and wholesale divisions.

Staff writer Nancy Trejos contributed to this report.