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<< Previous   of   Next >>   ADVERTISEMENT   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Sunday, October 5, 2008 Mortgage business is alive and well Prospective homebuyers with decent credit and steady income should have no problem securing a mortgage. By Steve Tytler Question: We want to buy a house now that home prices are finally coming down to the point where we might be able to afford one. But we keep hearing that due to the credit crunch it is almost impossible to get a mortgage now unless you have a 20-percent down payment. Is it true that it's very hard to get a loan to buy a home now? N.B. Everett Answer: This is a common misunderstanding of the mortgage mess. My wife recently overheard a similar conversation while standing in line at the grocery store. Many people have the idea that you can't get a mortgage these days unless you have a large down payment and absolutely perfect credit. That's simply not true. The rules in the mortgage industry have changed dramatically this year, but only in the sense that we are now using common sense underwriting standards rather than the loose anything-goes era of a couple years ago. For example, mortgage lenders now actually verify that the borrower earns as much income as they have stated on their loan application form. As I said above, that may seem like common sense, but stated income loans were all the rage a couple of years ago and on those kind of loans, the applicants often grossly overstated their monthly income in order to qualify for a larger mortgage amount. They could get away with it because there was no verification of employment or income. The borrower simply stated how much money they made and the mortgage lenders took their word for it. I know it sounds crazy, but that's what happened. In the mortgage industry, stated income loans became known as liar loans because many borrowers were literally making up income numbers out of thin air. Stated income loans were originally intended for self-employed people and other borrowers with complicated income tax returns that made it difficult to determine their actual monthly income. But the stated loan program was badly abused by unethical loan officers and loan applicants who were willing partners in crime -- although in some cases, the borrowers claim they did not really understand what they were doing. One of the reasons that banks are dealing with so many mortgage foreclosures today is because so many borrowers used liar loans to take out mortgages that they could not possibly afford to repay based on their real income. That's why stated income loans are now basically nonexistent, expect for a few rare exceptions that require a 30 percent to 50 percent down payment. Another popular loan program that has now disappeared is the zero down-payment loan. For a few years, you could buy a home with a combination of two mortgages: A first mortgage that covered 80 percent of the purchase price and a second mortgage (at a higher interest rate) that covered the remaining 20 percent of the purchase price. This was obviously a very popular loan program for first-time homebuyers who did not have enough money saved up to make even a minimal down payment. But as with the liar loans, many of the zero-down loans have gone into foreclosure because the borrowers have no cash tied up in the house so they have no incentive to keep making payments on a house that has decreased in value. That's why mortgage lenders have stopped making zero-down loans -- except for the VA loan program that is government insured. Only veterans and active duty military personnel are eligible for zero-down VA loans. Other than the stated income and zero-down loans, it's pretty much business as usual in the mortgage industry. If you have a steady income that can be verified, reasonable credit rating (620 FICO score or better) and enough cash to make at least a 3 percent to 5 percent down payment you can qualify for a mortgage to buy a home. You do not have to have perfect credit and you don't have to have a 20 percent down payment. All you need is enough money to make a minimum down payment because in today's slow housing market the sellers are often willing to pay all of the homebuyer's loan closing costs. So don't be fooled by news reports that say banks have stopped lending money. Contact a bank or mortgage company and get pre-approved for a loan based on your income and credit, and then go shopping for a house. Mail your real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206, or e-mail him at economy@heraldnet.com. READER COMMENTS Be the first to comment. You must be a registered user and verify your e-mail address to post comments to blogs or articles on HeraldNet. To register, click here. To read other terms and conditions, click here. Log out

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