The Credit Crunch Is Making Home Lending Harder And Harder To GetFor a while, most folks felt secure knowing they were over the 620-640 FICO mark with their credit score. This number of course being the rough borderline for subprime credit. And up until now, that was pretty much all you needed.

However, as the housing bubble bursts open, it gets everything wet. We’ve been watching the effects creep closer and closer into other markets, and now it’s pushing the minimum requirements up even higher for non-subprime buyers.

According to Pioneer Press:

If you think you’re exempt from the current credit crunch because you have a decent credit score, think again.

Things are tightening up for folks looking for a mortgage or to refinance, even those not in the subprime category.

Lenders now expect borrowers to have solid proof of their income, more money down and higher credit scores than in the past.

For example, consumers with a FICO score in the 640 range that once qualified for 100 percent financing and a decent interest rate will see that rate go up a quarter of a percent or so, said Mark Teteris, CEO of Lakeland Mortgage, a residential mortgage lender in Bloomington. Such borrowers should also expect to scrape together a down payment of at least 5 percent, he said.

The changes for new borrowers stem from a tightening in standards by government-sponsored entities like Fannie Mae and Freddie Mac and by other investors that buy pools of mortgages.

During the mortgage boom of the past several years, some pools of loans that were rated “investment-grade” turned out to be loaded with high-risk borrowers. When these borrowers began to default on their mortgages, investors who bought the loan pools as mortgage-backed securities got burned and banks and GSEs holding the mortgages were hit by steep credit losses.

Now investors and GSEs are raising their standards in hopes of lowering their risk in the future.

This is no temporary blip, bankers and other lenders say. “I’d say this is going to be long term,” said Jim Miley, president of residential real estate for Bremer Financial Corp. in St. Paul. Miley said he has seen a definite upward migration in desired FICO scores. “I think we will continue to tighten until the investors are satisfied that the mortgage pools are basically ‘what you see is what you get.’ ”

The changes and stricter standards don’t mean that borrowers are locked out of the housing market altogether.

“Today you can go out and get a very rock-solid purchase price on a home and a very good mortgage,” Miley said. “You are going to be processed in a more prudent manner and you should be expecting to have a down payment.”

While a year ago, a plethora of 100 percent financing products existed, such options could be nearing extinction. Bremer and Lakeland both have pulled back on such offers, Miley and Teteris said. But what if you don’t have 5 percent to put down?

Still, some borrowers may be out of luck.

Mary Wetterlin, general manager of the first mortgage division at TopLine Federal Credit Union in Maple Grove said she’s met with several customers hoping to refinance before the interest rates on their adjustable rate mortgages go up this fall.

She’s having to say no more frequently than she would like.

For some homeowners, the value of their house has gone down as the inventory of unsold houses in their area has risen. Others don’t have enough equity to refinance, because they’ve already refinanced or borrowed some of the equity they had in their home to pay for improvements, discretionary items or debts.

Try as she might, Wetterlin just can’t make refinancings work for borrowers like these.

TopLine sells its loans to Fannie Mae, and “The Fannie Maes and Freddie Macs of the world are not so willing to take that debt,” Wetterlin said. “Maybe a few years ago they would have been willing to do that … but that has gone away.”

We just can’t help people, even if we wanted to,” Wetterlin said. “I feel like I am sounding like Ebenezer Scrooge. … On the one hand I don’t want to see these neighborhoods blow up and end up (with) rows of foreclosed homes. … But it’s a struggle.”

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Comment by Noreel
2007-08-24 11:04:57

Yes this is something ive been telling folks but people are having a hard time wrapping it around their heads.
Standards are going up regarding the “quality” of borrowers and the options (different types of mortgages) are going down.

To get a loan now you will need:
1- Higher FICO Score (620/640+)
2-Down payments are going up (15% +)
and worst of all:
3-Types of loans are way down (30 & 15 Year Fixed will always be around but Adjustable options will decreases substantially)

Also to add ‘salt to the wound’ rent prices are skyrocketing.

The average folks are getting squeezed big time.

Comment by MG
2007-08-24 12:01:23

Ain’t that the truth.

I’m curious if we’ll see things completely disappear regarding easy financing, or if it will come back after the flood has died down.

Being in the early stages of things here though, I think we’ll see in time. Most likely after we find out what happens with Countrywide after the dust settles. The BofA stuff in the recent news seems promising.

Comment by Noreel
2007-08-25 14:48:30

Ya i agree with you.
We will have to wait until the dust settles.
But the longer it takes for the ‘dust to settle’ the more people will get hurt.
We will always have the Fixed Loans (15 year or 30 year) and we willl have some type of ARM available.
Its just my opinion but I am guessing we will still have as many options as we have today BUT from now on we will have substantial down payment requirements (15% or more) and the concept of PiggyBack Loans (2nd Fixed Mortgage Loan, or HELOCs, etc) will become severally reduced if not eliminated.

Just my thoughts.

Love your Blog keep up the good work.

Comment by Mr.O.
2007-08-29 01:26:40

That’s OK and I don’t think anybody should get a house for free.
But the crap is hitting the fan here.
Grampy and Grandma and Mom and Dad.
Zero downs and interest only.
When it REALLY hits the fan, you have nobody to blame but yourselfs.

2008-02-22 09:59:52

[...] contracts, as well as less traffic and fewer offers at their developments. Potential customers are fighting suddenly stiffer credit hurdles and often the challenge of selling their existing [...]

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