What's ahead for mortgages in 2009

By Bankrate.com

If 2008 was the year of foreclosures and when "underwater" entered every homeowner's lexicon, 2009 will be the year of refinances and mortgage modifications.

In hindsight, the mortgage mess seemed inevitable: Absurdly loose credit from 2002 to 2007 led to a bubble in house prices, scores of subprime lenders went out of business in 2007 as the risks caught up with them, and the misery spread to homeowners in 2008.

As home prices fell, millions of homeowners discovered that they owed more than their houses were worth. They were unable to refinance and unable to sell. Delinquencies (defined as house payments at least 30 days late) soared.

As the recession matures in 2009, more people are going to fall behind on their mortgage payments. At the same time, the federal government will try to hold down mortgage rates. And house prices will continue to fall. These three factors limit the smart moves you can make in 2009 with your mortgage and equity debt.

Buying a house

House prices have been falling in most places. In declining markets, people have trouble deciding whether to buy a house now or wait for prices to fall further. Instead of getting stuck on the buy-or-wait question, smart consumers consider other questions first:

• Play the videos to the right for more housing advice.

1. Have we put our financial house in order? Not long ago, the best mortgage deals were offered to borrowers with credit scores of 720 or higher. Nowadays, many lenders' thresholds have risen to 740. The necessity of a higher credit score is just one consequence of the mortgage debacle, and lenders have tightened their requirements in other ways, too.

During the boom years, many applicants merely stated their incomes without having to provide documentation. Those days are gone. Low-documentation and no-documentation loans are rare. Expect to provide paycheck stubs or tax returns, or both, to demonstrate that you earn what you say you earn.

• Estimate your credit scores

The lender will want to see that your expenses are in line with your income. You might have to provide bank statements to show where the money goes. If a big chunk of your monthly income goes toward debts for credit cards, cars and college, the lender might constrain the amount you may borrow.

2. Have we saved enough for a down payment? During the credit and housing boom, people routinely bought houses with no money down. Piggyback loans were the norm as homeowners avoided mortgage insurance. Now, substantial down payments have made a comeback, and so has mortgage insurance.

A few low-down-payment programs are still available, all courtesy of the federal government. The Department of Veterans Affairs guarantees mortgages with no down payment, and so does the Department of Agriculture's Rural Housing Service. There are restrictions on who is eligible for those loans, where the loans are available and for how much.

More people are eligible for Federal Housing Administration-insured mortgages, which require down payments as low as 3.5%.

Outside those federal loan programs, most lenders require significant down payments. The requirements vary by lender, the type of dwelling and where it is. A few creditworthy people might be able to buy houses with 5% down, but a 10% minimum is more common.

• How to come up with a down payment

Mortgage insurance companies won't insure loans on Florida condominiums, so lenders require down payments of at least 20%. For jumbo mortgages in California, many lenders require 30% down payments.

On top of that, the lender will want to know how you got the down payment money. Is it from personal savings? Was all or part of the money a gift from family? If some of the money was given to you, the lender will want to make sure you have enough savings and income to handle temporary financial setbacks.

• Home Affordability Calculator: Run the numbers

3. Is this the right time in our lives? Homebuyers, especially first-timers, should aim to own for the medium to long term. House prices have room to fall further in many -- if not most -- markets, and it could take years for prices to rebound. In short, it's a bad idea to buy a house with the intention of selling it in two or three years. Doing so could be a money-losing proposition, especially after factoring in the costs of real-estate commissions and taxes.

Continued: Refinancing the mortgage

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