Credit crisis changes the rules


Mortgage applicants face greater scrutiny of ability to pay.


You've read about the credit crisis, about stocks tumbling, about thousands of subprime loans exploding and home foreclosures on the rise. How will this affect you?

If you are a borrower - and who isn't - you need to know the rules of the mortgage market have changed. The credit crunch has taken some of the exotic loan options off the table. A lot of those loans were bad for borrowers. And some ugly lending practices are disappearing.

You can still get a mortgage, even if your credit isn't great or you have only a small down payment, but you'll have a harder time qualifying for it.

For those with a mortgage who want to refinance, that's trickier. It can be done, but not if your property's value has fallen off a cliff.

"Banks haven't stopped lending money to people, they've just made it more practical on both sides," said Casey Casperson, a senior loan officer with Chase in Palm Beach Gardens. "Now they're making borrowers prove they can pay it back."

During the housing boom, lenders didn't require that of borrowers. As unbelievable as that sounds - let's give money to people without checking to see if they have a job or looking at their pay stub - it was the way the subprime market worked. What happened a few weeks ago was investors who bought those mortgages from lenders simply stopped buying. They feared the tumble in housing prices and the rise in mortgage defaults made these mortgages virtually worthless.

Now that no one is willing to take on the riskiest mortgages, lenders say they've raised their standards.

Here's what a borrower needs to know:

Try to improve your credit score and offer more proof. Three or four months ago, Casperson said some lenders asked for only your name, address, phone number, Social Security number - and a 5 percent down payment.

Today, if your down payment is a tiny percentage, the lender's going to check your employment and verify your income.

And, on the most risky loans, lenders want higher credit scores. Jonathan Klein, general manager of Associates Home Mortgage in Boca Raton, says he knows of one lender who is still making piggyback loans - in which borrowers simultaneously take out a mortgage and a home equity loan - but credit scores for those borrowers now must be a minimum of 700, up from 680.

Ask to borrow less. At Wachovia, those 5 percent down payment mortgages with no verification are gone. If you want a loan that does not require proof of income, you must put 20 percent down. And you'll need a higher credit score than in the past for any high loan-to-value mortgage, a spokesman for SunTrust said.

It's similar for borrowers with credit that's not good - 20 percent down payments are being required.

Borrowers need to understand how much mortgage they can afford, because lenders are no longer allowing you to promise to repay too much.

In the subprime market, it was common for a lender to tell a borrower he or she could afford to devote 50 percent of monthly pretax income to the combined total of the mortgage payment, property taxes, homeowners insurance plus all other consumer debt such as credit cards and car loans.

Now, lenders say they want to keep that debt payment ratio at 38 percent to 40 percent of a borrower's pretax income or less.

If you're borrowing a lot, expect to repay more. Interest rates have gone up significantly on jumbo loans, those for more than $417,000. And that's not all.

Klein was recently working on a $480,000 mortgage for a home near Loxahatchee, in western Palm Beach County, a few weeks ago. The buyer was making a 25 percent down payment and the interest rate was to be 7 percent.

The day the loan was scheduled to close "was the day when the market completely collapsed," he said.

In a matter of two hours, the interest rate rose to 8 percent and the borrower had to pay 5 points, for an extra cost of $17,000 on the loan, to prevent the deal from falling through.

Old-fashioned, fixed-rate mortgages that aren't jumbos are actually going down in price. That's what most borrowers need. Blair Glenn, who is in charge of mortgage lending in Florida for Wachovia, says the average loan amount in South Florida is $362,000. Rates on a fixed-rate, 30-year mortgage, for an amount that is less than $417,000, Thursday averaged 6.52 percent. That's lower than in June and July.

If you need to refinance, it could be tough. Lenders say it's fairly common for borrowers who bought their homes in the last two years to find that the value of the property has dropped and they owe more than it's worth.

The refinancing happening now is for borrowers whose homes have held their value and don't want to take cash out from their home equity.

Lenders told me they expect this turmoil in the mortgage industry to settle down over the next six to 12 months. The credit crunch in mortgages, so far, hasn't spread to other forms of credit that consumers use such as credit cards.

There are signs that the picture is even brighter. Glenn said his volume of loan applications is double what it was a few months ago. Casperson, too, said his loan volume is up sharply. A hint that the housing slump might be hitting bottom? "There are a lot of purchases going on in South Florida," Glenn said.


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