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.

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.

First-time homeowners sometimes make the mistake of not adding up all the costs of getting mortgage loans. Of course shopping for competitive mortgage rates is important, but keep in mind that your monthly payment includes real-estate taxes and homeowners insurance. Anytime you use a monthly payment calculator to figure out the cost of getting a home loan, it’s important  to include your best estimates for insurance and taxes.

Property Taxes

You can’t deduct your homeowners insurance premiums, but you can deduct real-estate taxes. Deductions can be taken for any state, local, or foreign taxes on real property. If your state or county imposes local benefit taxes related to property improvements such as sidewalks or streets, they cannot be deducted.

After you’ve owned a home for a while, you can file an appeal to try and get your property taxes lowered if you think you are paying too much. You must contact the local government to find out what the procedure is for appealing property taxes. Generally, you only have a certain window of time to appeal after receiving your annual assessment.

Mortage Interest

The interest paid on a home mortgage is also deductible. Interest on mortage loans can be deducted for your principal residence and for a vacation home. If you have a second home that is also rented out for part of the year, you must use the house for more than 14 days or more than 10% of the number of days during the year that the home is rented at fair value. If you have more than one property that you rent out, the mortgage interest deduction can only be taken on one of them.

Deductible interest must be paid on a mortgage for your first home, second mortgage, home equity loan, or home equity line of credit (HELOC). If you pay mortgage interest for someone else but are not legally liable for the loan, you cannot take a deduction for that amount.

Filing Your Taxes

When filing your income taxes on Form 1040 you have to decide whether you are going to take the standard deduction or itemize deductions on a Schedule A. The best rule of thumb is to itemize deductions if they add up to more than the standard deduction. But unless you choose to itemize you won’t be able to deduct interest from your home loan or real-estate taxes.

Don’t waste time and money when buying a home. Avoid making the following mistakes when purchasing a property.

1. Not setting a budget. Do you have caviar tastes on a crackers and cheese budget? Run the numbers on your finances before heading out to look for a home.  That way you can shop within your budget and won’t experience delays when applying for a mortgage. It’s also important to buy a home within your means. Bigger may seem better until you’re struggling to make the mortgage payments and keep the heat on.
2. Not getting pre-approved for mortgage loans. A pre-approval letter shows that a mortgage lender is committing to give you a home loan. This puts you in a better position to negotiate a deal.
3. Letting emotions take over. Buying a home is probably the biggest purchase you’re going to make in your life. Don’t let your emotions cloud your judgment. If you see a lot of red flags and feel uncomfortable with a deal, don’t ignore those feelings. While you may think you’ve found your dream home, there are other properties out there. 
4. Trying to time mortgage rates. When it’s time to get a home loan, compare current mortgage rates from several mortgage lenders to find the best deal. If you’ve done everything you can to clean up your credit, and save up a nice down payment, you should qualify for a competitive mortgage rate regardless of what’s happening with the economy.
5. Signing contracts without understanding them. Many homeowners caught up in the subprime mortgage mess claim they just didn’t know what they were getting into when they purchased property. You may not be a legal expert, but you must pay one to represent you. Hire a knowledgeable attorney who can review your contract and look out for your interests.
6. Not getting a home inspection. Even if a house looks perfect, there are bound to be some type of problems lurking about. In fact, some new homes could even have problems that wouldn’t be found without a home inspection. Your housing contract should allow for contingencies related to the home inspection.
7. Not taking advantage of programs that help you buy a home, such as the government’s homebuyer tax credit of up to $8,000. Many communities also have programs targeted at first-time homeowners or other information sessions.

Becoming a homeowner can be exciting and scary all at the same time. Learn as much as you can about the process and find reliable professionals for your team to make the home buying process as smooth as possible.

It’s a buyer’s market right now for people wanting to purchase homes. Housing prices are affordable and mortgage rates are low. But if you don’t have a sizable down payment saved up, you could end up straining your finances.

Use a Mortgage Payment Calculator

Before applying for a home loan you should go on a fact-finding mission to determine how much house you can afford. While it’s fun to visit open houses and browse through homes for sale at various Web sites, it’s just as important to crunch the numbers with a mortgage payment calculator to see what your monthly bill is going to look like.

Your Down Payment Matters

So much attention gets focused on mortgage rates that many people don’t really stop to think about how the size of their down payment is a key factor in how money they’ll shell out for housing payments for the next 30 years or so.

During the housing boom, mortgage lenders often enticed borrowers with home loans that required zero or low down payments. Millions of home buyers jumped into these mortgage loans, desperate to get a piece of America’s homeownership dream even though it meant high monthly payments or mortgage rates that would adjust up in the future.

Who Can Get Low Down Payments?

Mortgage lenders are reluctant to offer many borrowers low down payment mortgage loans these days. Some borrowers may be able to qualify for low down payments, but many mortgage lenders are looking for 20% down to underwrite home loans at the best mortgage rates.

FHA Changes Down Payment Rules

Even the Federal Housing Administration is rethinking its 3.5% down payment option. It recently announced a policy change to only allow people with credit scores of at least 580 to qualify for the 3.5% down payment. Borrowers with lower credit scores must put down at least 10% on a mortgage loan.

Beyond Home Loan Principal and Interest

When using a mortgage calculator be sure to plug in your estimated costs for homeowners insurance, property taxes, and homeowners association (HOA) dues. Depending upon where you buy a home, these costs could add a significant amount of money to your monthly housing bill.

Are You Ready to Get a Mortgage Loan?

Your fact-finding mission should determine whether or not you are ready to apply for a mortgage loan and buy a home. After running all the numbers through your calculator and looking at how much debt you can afford to carry on your current income, it may be prudent to postpone a home purchase. But if you feel that you are ready to take the plunge, shop around and compare quotes from several mortgage lenders to find the best deal.

Fannie Mae is offering buyers of its foreclosed homes help with mortgage closing costs.

Mortgage Closing Costs or Appliances

Homebuyers who purchase a HomePath property owned by Fannie Mae will receive 3.5% of the final sales price toward closing costs on a home loan or appliances. Homebuyers also can choose to apply the incentive to a mix of closing costs on a mortgage loan and appliances.

To receive assistance you must purchase a property listed on HomePath.com before May 1, 2010.  Offers must be accepted on or after Jan. 28, 2010.

The HomePath Web site has photos of available homes and detailed property descriptons. Only properties purchased as your principal residence qualify for the program.

Reducing Inventory of Homes

 ”Attracting qualified buyers to the market and reducing the inventory of vacant homes is critical to stabilizing neighborhoods and helping the market recover. Many families are taking advantage of the federal homebuyer tax credit to buy a new home so this is a great time for Fannie Mae to offer some additional help,” Terry Edwards, Executive Vice President of Credit Portfolio Management, said in a statement.

Fannie Mae sold 89,691 foreclosed homes in the third quarter of 2009, according to the Washington Post. 

Talk with Fannie Mae Listing Broker

People who are interested in getting a mortgage and with assistance from Fannie Mae should discuss their options with a Fannie Mae listing broker. Mortgage lenders can restrict how the 3.5% incentive can be used.

Fannie Mae Mortgage Help

Fannie Mae also offers financing on some homes. The agency offers mortgage loans with low down payments even if you don’t have the best credit. The home loans don’t require mortgage insurance or appraisal fees. The HomePath Renovation Mortgage is available to purchase and renovate homes.

The down payment for both types of mortgages must be at least 3% and can be funded by your savings, a gift, grant, or loan from a nonprofit, state, or local government, or employer.

Homebuyer Tax Credit

Homebuyers also can claim the First-Time Homebuyer Credit for homes purchased through April 30, 2010. They must close on home loans by June 30, to be eligible for the tax credit, according to the Internal Revenue Service. 

First-time homebuyers are eligible for a tax credit up to $8,000. Existing home owners who have lived in their house for five consecutive years out of the past eight are eligible for a tax credit of up to $6,500.

Expect to pay more money to borrow a mortgage loan insured by the Federal Housing Administration  (FHA). Policy changes at the agency are designed to help the FHA better manage its risk as the housing market recovers.

“Striking the right balance between managing the FHA’s risk, continuing to provide access to under-served communities, and supporting the nation’s economic recovery is critically important,” FHA Commissioner David Stevens said in a statement.

Here’s what you can expect if you apply for an FHA mortgage.

Mortgage Insurance Premiums Rise

The FHA is raising the mortgage insurance premium (MIP) to help build up capital reserves and help spur private lending. The upfront MIP is rising to 2.25% from 1.75%. The FHA intends to shift some of the premium increase to the annual MIP from the upfront MIP so it can have less impact on borrowers.

Mortgage Loans and FICO Scores

 The policy changes now require borrowers to have a FICO score of at 580 to qualify for the 3.5% down payment on a FHA home loan. Anyone who has a FICO score below 580 must make a down payment of at least 10%. The new credit score requirement goes into effect this summer.

Less Help from Sellers

The revised guidelines decrease the amount of help you can get from the seller when buying a home. The FHA is reducing concessions by sellers to 3% from 6%. Concessions include things such as sellers helping with closing costs. This change conforms to industry standards.

More Enforcement on Mortgage Lenders

The FHA also says it plans to report performance rankings on mortgage lenders as a complement to Neighborhood Watch data. The move is aimed at making mortgage lenders more accountable.

Troubled Mortgage Loans

As the economy has struggled more borrowers have turned to FHA mortgages because they require smaller down payments than other loans. About 30% of new home loans are insured by the FHA. Now, the FHA finds itself burdened with a slew of troubled loans.

The FHA says it is still committed to proving mortgages to first-time homebuyers. But the tougher lending requirements mean some people may not qualify for  mortgage loans.

“It will slow the growth in demand.  Any time you put up roadblocks, fewer people will qualify,” Joel Naroff, of Naroff Economic Advisors, told USA Today. “This is just the beginning of clearer and more specific requirements so we don’t get into the mess we got into again. In the short term, it will have an effect, but it won’t be a huge effect.”

More homeowners are choosing to walk away from their mortgage loans rather than make payments on homes that have lost significant value. These strategic defaulters intentionally stop paying on mortgages even though they can afford to make the payments.

The practice has many people debating the ethics of walking away from home loans. Some people see nothing wrong with the practice while others say homeowners who intentionally default are immoral.

Mortgages as Baggage

Strategic defaults have especially risen in Arizona, California, Nevada, and Florida, according to the Wall Street Journal. Those states have high percentages of people underwater on mortgage loans, owing more than their homes are valued at.

Promise to Repay Mortgage Loan

While it may make financial sense to walk away from a home loan, the fact is that anyone who borrowed money signed a promissory note to repay the loan. That promissory note didn’t say pay up unless home values go down or until you get tired of making monthly payments.

Financial Damage

So what happens when homeowners strategically default? First, they end up in foreclosure, and the mortgage lender takes possession of the property. Then their credit scores get hit, plunging as much as 160 points. They also may have other assets seized by their mortgage lender depending upon where they live.

Mortgage Defaults Hurt Community

Strategic defaults don’t just hurt individual homeowners. They also affect the neighborhood where the property is located. Foreclosures significantly impact the property values of surrounding homes. The closer you live to a foreclosure, the more it negatively affects your home’s value, especially if it looks abandoned and poorly maintained.

People who lived withing 300 feet of a foreclosure usually saw their property value drop 1.3%, according to a 2008 study. People within 300 to 500 feet of a foreclosure had a 0.6% drop, according to the New York Times.

Could It Happen Again?

On the positive side strategic defaulters may be able to cut their housing costs while they rent for a while. That could help them save money. But it seems that if these people are willing to renege on a home loan once, they’re likely to do it again in the future if they don’t like the housing hand they’re dealt.

Strategic defaults are likely to continue as more people become fed up with being underwater on their mortgage loans. But anyone who decides to take this step should be prepared for the fallout.

Obtaining a new mortgage loan, auto loan, or other types of credit is going to be tough for years to come. They also may feel disapproval from other people who faithfully continued paying on their home loans even though they are underwater too.

Builder magazine recently had an article about whether or not the McMansion is dead. McMansions certainly seem out of reach for many Americans at a time when unemployment is high, demand for food stamps is up, and being frugal is in vogue.

McMansions Sitting Empty

It’s likely that the inability of many Americans to obtain jumbo mortgage loans combined with a movements to downsize may slow development of these supersized homes. Also, there seems to be an overall feeling among many folks that McMansions are wasteful. About 69% of Americans said the American home had gotten too large, according to a CNNMoney poll.

So should you give up your dream of owning a larger home, even it if can’t exactly be called a McMansion? Not necessarily. But here are a few practical things to consider.

Mortgage Debt-to-Income Ratio

You need a healthy income to afford home loan payments on a large home. Use a mortgage payment calculator to determine how much house you can afford. Keep in mind that you need to have a debt-to-income ratio within underwriter guidelines to get approved for a home loan.

Mortgage lenders usually don’t want you to have more than a 28/36 debt-to-income ratio. In other words, your housing expenses (including taxes and insurance) should ideally use up no more than 28% of your gross income, and your total debt (including a mortgage) should use up no more than 36% of your income.

Other Housing Costs Add Up

In addition to monthly mortgage payments, expect to shell out money for other housing-related costs. Those bills include utilities, repairs, and maintenance. Depending upon where you live you also may have to budget for lawn care, snow removal, or homeowner’s association dues.

Jumbo Mortgage Rates

Mortgage lenders set higher mortgage rates for jumbo home loans. There also tend to be more fees. What is classified as a jumbo mortgage loan differs from one area to the next. In most states mortgages over the conventional loan limit of $417,000 are considered jumbo loans. You are unlikely to qualify for this type of mortgage unless you have excellent credit and a substantial down payment.

Ultimately, the decision to buy a large home is a personal one. But among the things to consider are whether you really require a lot of space, believe your income is going to remain stable, have a lot of family members who plan to live there and share the expenses, and whether or not you have the time and money to maintain a large property.

I recently wrote about how more than 650,000 home mortgages had been modified this year through October because of the government’s foreclosure prevention plan. That number increased to more than 697,000 mortgage loans through November, but most of them were only trial modifications, according to Bloomberg. 

Permanent Mortgage Loan Modifications

Although the Making Home Affordable program aimed to help 4 million distressed homeowners, only 31,382 mortgages have actually been permanently modified, according to the Treasury Department. GMAC Mortgage Inc., JPMorgan Chase & Co., and Ocwen Financial Corp. completed the most mortgage loan modifications.

What’s Holding up the Process?

Home loan modifications have been affected by a variety of factors. The Obama administration has said that about a third of borrowers failed to provide proper proper documentation to get their mortgage loans modified permanently. Loan servicers also have dropped the ball in many cases. Some loan servicers have lost documents submitted by borrowers or not requested the appropriate documents.

Putting Pressure on Mortgage Lenders

The Treasury Department is stepping up pressure on mortgage lenders to get more loans permanently modified. In the meantime, more homeowners are falling behind on mortgage payments. About 7.9 million homeowners got behind on mortgage payments in the third quarter, according to the Mortgage Bankers Association.

Do Mortgage Modifications Have Poor Outlook?

Laurie Goodman, senior managing director of Amhert Securities Group LP, told Congress last week that the mortgage loan modification program is “destined to fail” because it doesn’t address the fact that so many homeowners have negative equity in their homes.

About a quarter of U.S homeowners have negative equity in their homes. That means they owe more on their mortgages than their homes are worth. Previously, estimates had put the number of homeowners with negative equity at around 32%.

Refinance Mortgage

Mortgage loan modifications obviously don’t work for everyone. But if you still need help lowering your monthly mortgage payments, consider mortgage refinancing. Contact your loan servicer to see if you qualify to refinance your mortgage through the Making Home Affordable program. To get refinancing through the government’s program you must be current on monthly payments and have a home loan that isn’t higher than 125% of your home’s value.

If you don’t qualify for that program, search for refinancing deals from mortgage lenders here.