credit & money management
Credit history and score now more important to getting loan
When the financial crisis hit, many banks became tight-fisted, and plenty of borrowers walked away empty-handed. But financial institutions have emerged from the recession stronger and ready to lend. "Credit is available. No question about it," says James Chessen, chief economist for the American Bankers Association. "Banks are being careful because the economy is still weak, but I don't know a bank out there that's not anxious to make a loan."
Keep in mind that from mortgages to car loans, your credit history and score matter more than they did before the crunch. Rates are at rock-bottom levels for borrowers with top-tier credit - generally credit scores above 720. Before you shop rates, get your credit reports and check for errors. See where you stand before you apply for a loan.
Mortgages: Stricter rules
Mortgage lenders want to make loans now, and they might even bid against one another for your business. But lending standards remain tight, and you must be prepared to produce a mound of paperwork to document your income and assets.
Rates are as low as they were in the 1950s, so going through the motions could pay off. In mid-September, the average interest rate for a 30-year, fixed-rate conforming loan - a mortgage of $417,000 or less - was 4.5 percent, according to HSH Associates, a mortgage-tracking firm. The initial rate for a 5/1 adjustable-rate mortgage (a fixed rate for five years, followed by annual adjustments) was 3.6 percent.
Fannie Mae, Freddie Mac and the Federal Housing Administration continue to dominate the mortgage market, setting the standards for the loans that lenders make and sell to investors. So lenders strive to dot every "i" and cross every "t" when they qualify you.
If you're buying or refinancing the mortgage on your primary home, you'll need a minimum down payment of 5 to 10 percent for a conforming loan or 10 to 15 percent for a conforming jumbo loan (125 percent of a metro area's median home price, up to $729,750). With 20 percent or more down, you avoid private mortgage insurance, which typically costs 0.5 to 1.5 percent of your loan amount a year.
Fannie Mae and Freddie Mac allow a minimum credit score of 620 if you have at least 25 percent equity in the property or a score of 660 with equity of less than 25 percent; you'll get the best rate if your score exceeds 720. The FHA will soon require a minimum credit score of 580 to qualify with a down payment of 3.5 percent, but FHA lenders often impose a higher minimum score of 670.
In addition to your credit, lenders will also scrutinize your ability to pay, starting with your debt-to-income ratio. Monthly housing expenses (principal, interest, taxes, hazard insurance, private mortgage insurance and association fees) shouldn't account for more than 28 percent of gross monthly income. Total debt shouldn't exceed 36 percent of gross income, but in some cases lenders stretch the maximum to 45 percent.
Chris Bennett, a loan officer with HomeServices Lending in Charlotte, says he surprises borrowers "all the time" with preapproval of their loan when they aren't expecting it. Even people with lower credit scores might qualify if they have stable employment, a history of paying rent and credit lines on time, and money in the bank or in a retirement account.
However, Bennett also counsels some borrowers to delay their home purchase long enough to improve their credit score, eliminate debt, get a raise and save more money. They might earn a better interest rate, improving their buying power. Plus, he says, "it's not good to lay out every bit of cash you have if you won't have money for a rainy day."
Home equity: Lower limits
Several years ago, home values were rising so rapidly that you could build a pile of equity practically before the ink was dry on your settlement papers - and then borrow against it to pay for everything from home repairs to college tuition. But as prices have tumbled, lenders have tightened their criteria for approving fixed-rate home-equity loans and variable-rate lines of credit.
Now in most cities you'll be able to borrow no more than 80 percent of the appraised value, less the mortgage. In some cities you may get away with 90 percent, says Keith Gumbinger of HSH Associates. But where prices have plummeted, such as Florida, Nevada and California, the loan-to-value ratio goes as low as 60 percent.