The rules are designed to curtail the rise in the risky business of "nontraditional," "alternative," "exotic," even "toxic" mortgages, including interest-only, payment-option, piggy-back, stated-income (no-doc) and other types of adjustable rate mortgages (ARMs), as well as some home equity loans.
The products can be useful, allowing borrowers to buy a home (or qualify for a larger, more expensive home) they perhaps couldn't afford with a standard, fixed rate loan (FRM).
However, the rapid growth in the use of nontraditional mortgages, especially among the population of less creditworthy borrowers has alarmed regulators who now want to tighten requirements for those who want the loans.
That generally means lenders are obliged to tighten underwriting requirements including relying less upon credit scores and more on documented proof that your income and repayment capacity is. The feds say creditworthiness models that include less documentation have not been tested in a stressed environment, like the current market of falling home sales and prices and rising mortgage rates.
If you haven't already gotten the easy mortgage money of your choice you could face fewer loan choices, a more heavily scrutinized application and upward pressure on interest rates due to both the new rules and market conditions.
Here's how to improve the odds you'll get the loan of your choice.
Learn the ropes. Mortgage information resources are vast. Websites, topical newspaper articles, mortgage books, consumer seminars, workshops and counseling, financial planners, real estate agents, mortgage brokers and lenders are all available to assist you to give you insight on what is likely to be your greatest financial transaction ever.
Pull your credit report. You need to know where you stand before you apply for a mortgage. You want to know if there are errors, derogatory remarks or other information that could affect your application. You may also need some time to make things right. You are entitled to one free credit report each year from each of the three major credit reporting agencies -- Experian, Equifax and TransUnion -- through the official AnnualCreditReport.com.
Know your limits. As the Feds' proposal to curtail risky loans indicates, lenders have been more apt to qualify you for as much as they are willing to lend, with terms that appear like dreams today, but could become nightmares tomorrow. Stretch to afford the most home you can buy, if you want to avoid the cost of adding on or moving up later, but stretch only within the limits of what you can truly afford. Determine how your mortgage payment will fit your current budget and, to some extent, your future obligations. Calculate all the costs of home ownership from rising rates on ARMs to insurance and taxes as well as the cost offsetting financial benefits of home ownership, including tax breaks and equity growth.
Comparison shop now more than ever. Shop mortgage lenders, brokers and online mortgage outlets to compare the best of all worlds. To the extent that it's possible, compare all major loan costs, rates, points, broker fees and other costs to make the best comparison.
Be prepared. When it's time to complete your mortgage application, have your all your docs in a row. You may have to prove employment, job tenure, employment stability, income, assets and liabilities. Have pay stubs, tax returns, rental agreements, divorce decrees, proof of insurance and any other documentation you'll need to back up statements on your application.
Get help. Whenever possible, schlep all those documents down to the broker or lender's office and let the broker or loan officer assist you with completing the application, correctly, the first time. You can also seek help from a housing agency, independent mortgage counselor, financial planner, social service agency or other knowledgeable person.
Focus. You've done your homework. Settle on one loan. Complete one application and see it through. Don't "double dip." Online applications make it easy to fire off several quick applications, but each one could trigger a credit check. That could send the wrong signal to a lender who could reject an application that yields a credit report with numerous credit checks in a short period.
Stay put. Don't complete an online mortgage application, say at work, if you don't have Internet access at home or you'll defeat the purpose of the automated online mortgage process. Don't plan a vacation, road trip or getaway during the application process. If there are questions about your application, you'll need to be available to address them quickly.
Use a lock. During the loan application, get a rate lock, in writing. A rate lock guarantees you a certain interest rate and terms. The lock is in effect for a given period of time, which should be stated in the lock contract.
Get a commitment. Don't behave like a retail shopper who fills out a credit application in the checkout line. Get preapproved for you loan with a real loan commitment from the lender so that once you find your home you need only sign on the dotted line. When you go shopping for a home, the commitment tells the seller your offer is indeed worth a whole lot more than the paper it's printed on.
Published: October 3, 2006
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Broderick Perkins parlayed a career in old-school journalism into a
contemporary digital news service that really hits home.
The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services.
The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home.
Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News.
Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake.
He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications.
In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.
Broderick Perkins parlayed a career in old-school journalism into a
contemporary digital news service that really hits home.