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Want a Mortgage Loan? Good Luck

July 30th, 2010

Borrowers are going to continue having a tough time getting approved for  mortgage loans, according to Michael J. Williams, Fannie Mae’s CEO. Many potential home buyers have been turned away by mortgage lenders looking to minimize their risks as the economic crisis has lingered.

Mortgage Loans for the Next Generation

“A solid majority of renters assume it will be tougher for their kids to buy a home–and they’re right, too,” Williams said at a recent Women in Housing and Finance event. He added: “Across the board, we see a much deeper understanding of how credit, income, job security and a down payment could stand in the way of buying a home.”

Qualifying for a Home Loan

So what can be done to improve your chance of getting approved for a home loan? Let’s look at each of the key areas Williams mentioned.

  • Credit. You must clean up bad credit and so that mortgage lenders view your situation in favorable terms. Pay off debt, fix mistakes on your credit report, and avoid being late with monthly payments on bills.
  • Income. The days of the getting a home loan without proof of income are over. Whether you are buying a home or refinancing an existing mortgage, be prepared to provide payment stubs, W-2 forms, tax returns, and proof of other assets.
  • Job security. Although the media tends to focus on the doom and gloom of high unemployment rates, the fact of the matter is that most adults are still employed in some capacity. The longer you have been employed in a job, the more that helps your mortgage loan application. Try to avoid changing jobs if you plan to apply for a home mortgage.
  • Down payment. The amount of money you have to use as a down payment is just as important as what mortgage rate you get. That’s because the more money you have to put towards a home, the less your monthly payments will be. Putting down at least 20% as a down payment also helps you avoid paying mortgage insurance.

Yes, it’s going to be difficult going forward to get approved by a mortgage lender. But that doesn’t mean you have to give up your dream of getting a home loan. If you’re confident you can get approved now, you can begin comparing mortgage rates here.

Mortgage Rates Are Low, but Confidence Is Down

July 23rd, 2010

Low mortgage rates should bring out a stampede of home buyers looking for a deal with housing prices so much more affordable than a few years back. But that’s not happening as many potential buyers stay on the sidelines or can’t get approved for a home loan.

Mortgage Rates at All-Time Lows

Despite the fact that current mortgage rates are averaging 4.56% for a 30-year fixed loan — the lowest level ever — consumer confidence and home builder confidence have dropped. Mortgages rates for 15-year fixed loans are averaging 4.03%.

Frank Nothaft, Freddie Mac’s vice president and chief economist, said in a statement:

The decline in mortgages rates over the past few weeks echoes the recent signs of weakening confidence in the strength of the economy, particularly the housing and consumer sectors. For example, homebuilder confidence declined in July to lows not seen since April 2009, as measured by the NAHB/Wells Fargo Housing Market Index, following the large drop in housing starts reported for June.

Falling Home Values

Home values throughout much of the country have fallen and are expected to show more declines, although some economists say the worst of the housing crisis has passed.

Consumer confidence fell as many folks continued to worry about unemployment and overall conditions in the economy. The Conference Board’s Consumer Confidence Index dropped to 52.9 in June from 62.7 in May.

According to Lynn Franco, director of the Conference Board Consumer Research Center:

Consumer confidence, which had posted three consecutive monthly gains and appeared to be gaining some traction, retreated sharply in June. Increasing uncertainty and apprehension about the future state of the economy and labor market, no doubt a result of the recent slowdown in job growth, are the primary reasons for the sharp reversal in confidence. Until the pace of job growth picks up, consumer confidence is not likely to pick up.

Current Refinance Rates

Despite the concern about the economy, some homeowners are taking advantage of the low mortgage rates to refinance home loans. Doing a home refinance could make sense if it can significantly lower your monthly payments or get you out of a mortgage with adjustable rates.

You can begin gathering quotes for mortgage refinancing here. If you have a stable income, strong credit score, and equity in your home you may be able to qualify for a home refinance despite concern about where the economy is heading. 

Pros and Cons of Home Equity Loans

July 18th, 2010

When you apply for a home equity loan the lender requires that your home be used as collateral. This type of loan is considered a second mortgage.

Decline in Home Values

Some homeowners have had a difficult time qualifying for home equity loans during the credit crunch because of falling home values. But if you have good credit and a decent amount of equity, there is a chance you can get approved to borrow money.

It’s never a good idea to borrow money if you don’t need to. But if you are house rich and cash poor, a home equity loan can be useful if you need to make home improvements, pay college costs, or even consolidate high-interest debt.

When considering a home equity loan keep in mind the following pros and cons. Pros include:

  • Home equity loans usually have much lower interest rates than credit cards and rates are often fixed.
  • Interest paid on home equity loans is tax deductible.
  • Depending upon how much equity you have you may qualify for a sizable amount of money.

Among the cons of getting a home equity loan are:

  • If your property values declines significantly, you could end up owing more on your mortgages than your home is worth. This is commonly referred to as being upside down on a mortgage.
  • Borrowing money by using your home as collateral is risky. If you can’t afford to keep making payments on a home equity loan, you could end up losing your property.

Access to a Line of Credit

Keep in mind that home equity loans differ from home equity lines of credit (HELOCs). A line of credit also allows you to tap into your home equity, but it is set up so you can draw on the money as you need it instead of taking a lump sum. Both home equity loans and HELOCs usually have shorter terms of repayment than first mortgage loans.

Tighter Lending Standards

Some people who were previously approved for HELOCs have had their lines of credit frozen because banks have tightened up on lending. In other cases people who have strong credit histories have been denied HELOCs because banks are reluctant to extend credit.

Shop around to compare home equity loans to find the best deals. Familiarize yourself with all the terms before signing up.

Rich Homeowners Walking Away from Mortgage Loans

July 9th, 2010

Think the rich are immune to the housing crisis? You would be wrong. According to the New York Times, “more than one in seven homeowners with loans in excess of a million dollars are seriously delinquent.”

Walking Away from Home Loans

CoreLogic compiled data that indicate that people with less expensive homes are more likely to continue making payments to mortgage lenders. “Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment,” the article states. Sam Khater, CoreLogic’s senior economist, was quoted as saying, “The rich are different: they are more ruthless.”

Strategic mortgage defaults have become more common as the housing market has struggled to recover. Some homeowners have simply stopped paying on mortgage loans because  they see no point in putting money into properties that have lost significant value. It’s not that they can’t afford to make payments on home loans, they just don’t want to.

Falling Home Prices

According to a recent article on Freddie Mac’s Web site, many strategic defaulters live in states where housing prices have suffered huge drops. Walking away from homes, the article argues, hurts entire communities in the long run:

That’s because strategic defaults affect many other families and communities. And these costs – or as they are known in economic jargon, externalities – are not factored into the individual borrower’s calculations.

Let’s start with the neighbors. When strategic defaults occur, homes go into foreclosure and sit vacant for some period of time. We know from experience that foreclosures and vacancies drive down the property values of everyone else in the neighborhood. Thus, strategic defaulters, in effect, deplete the personal wealth of their neighbors. 

Average Joe and Jane

Ultimately, it’s the average homeowner who is likely to be affected the most. A middle-class family that loses a home through foreclosure is likely to struggle for years to rebuild a stable financial situation.

Defaulting on Mortgages and Still Living Large

When people with million-dollar properties default on home loans, they often continue to have access to other financial resources and investments. They may even have a second or third home to move into and continue to live a pretty comfortable lifestyle.

Avoid Defaulting on a Mortgage

Whatever your income level or home’s value, it’s best to do everything you can to avoid defaulting — strategically or otherwise. Alternatives to strategically defaulting include resigning yourself to making mortgage payments even if you’ve lost a lot of home equity and waiting for the market to recover.

You could also try to refinance your mortgage loan to lower your payments and interest. Finally, if necessary, do whatever is necessary to sell your home to get rid of mortgage payments.