Getting a home loan just got harder

By Marilyn Lewis

With the news full of stories about the collapse of lenders that sell mortgages to people with less-than-perfect credit, the survivors are clamping down, leaving first-time homebuyers to wonder, "Will I still be able to buy a house?" People with loans nearing the end of low-interest introductory periods are asking themselves, "Can I qualify for a refinance I can afford?"

The short answer, of course, is that it depends.

"The prime people will still be able to get loans. You'll just have to have a down payment, documentation and a higher credit rating, (although) I think there will be even some tightening in the prime," says Christopher Cagan, director of research and analytics for First American Real Estate Solutions in Santa Ana, Calif.

"It's the marginal people going for the subprime, low-doc loans who'll feel the change," he says. "They're going to be asked, 'Where's your documentation? Let me check that appraisal. What's your income?' "

In a nutshell, here's what the changes are likely to mean to you:

• With a FICO score roughly above 620 and a stable income, you're likely to be a "prime" customer, although factors like other debt you're carrying and how much you want to borrow also enter the equation. Experts differ on whether they expect lenders to get fussier in evaluating customers for prime loans. Most say that with a strong record of paying bills on time, a documented, steady income and a loan request no bigger than 80% of the value of a property, you should be able to borrow easily and at a low rate. In fact, if you are in the prime category, now is a great time to refinance, since 30-year fixed rates are dropping to 6%, says Mike Fratantoni, senior economist with the Mortgage Bankers Association.
• If your FICO score is below 620, you may still get a loan, but it's likely to be an expensive subprime product.

The new environment

Until early 2006, the overheated lending market was pumping out money. Brokers competed to sell mortgages, and, in many cities, incentives to sell stoked home prices into double-digit yearly appreciation. Loans covering 100% of a home's purchase price were not uncommon, with no down payment required. Borrowers, even with badly damaged credit, were breezing into lenders' offices and emerging with loans that sometimes even locked them into paying more than they earned.

Now, "it's back to the old-fashioned rules," Cagan says. With less money available, and with fewer buyers and a glut of houses for sale, lenders are requiring detailed application forms and documents detailing finances and income.

Cagan is predicting that 13% of the 8.37 million adjustable-rate mortgages sold from 2004 to 2006 will fall into foreclosure in the next six or seven years, and that certainly will be disastrous for the 1.1 million families involved. But he's adamant that "this will not break the economy."

Still, talks with regulators and mortgage finance experts reveal some major implications for homeowners in the changing lending climate.

The three primary changes are:

• A sharp reduction in "no-doc" loans.
• A big reduction in 100% financing.
• The return to strict, traditional standards in qualifying borrowers.

Most change will be concentrated in the riskier subprime market. That affects borrowers who can't document a steady income or an income substantial enough to make payments on the loan they want. People whose bankruptcy was discharged fewer than four -- or even as long as seven -- years ago may have to wait awhile to borrow, experts say.

• Video: How much house can you buy?

While interest rates are expected to rise, they'll rise higher on subprime loans. For some borrowers, the question won't be "Can I get a loan?" but "Can I get a big enough loan to buy the house I want?"

"Those higher rates are going to be fed through to borrowers immediately," says Fratantoni, the Mortgage Bankers Association economist. "Some portion of the subprime market will no longer be able to qualify for loans."

Subprime products won't completely disappear, says Dustin Hobbs, spokesman for the California Mortgage Bankers Association, but the range and availability are likely to shrink.

No-doc loans

No-documentation or low-documentation loans will be considerably harder to find. "We are going to crack down on the use of these low-documentation products," says Sharon McHale, spokeswoman for Freddie Mac, the congressionally chartered nonprofit corporation that works to create housing affordability.

With no-doc and low-doc loans, lenders waived income documentation requirements, taking a borrowers' word for their income or not asking at all. Such "stated-income" loans are sometimes called "liars' loans," and no doubt plenty of borrowers did overstate their incomes. But stated-income loans are a godsend for self-employed people who have a good, if erratic, income or take a lot of tax deductions, creating a low net number on their income tax returns, the document lenders use to verify income.

"Lenders are going to be doing more to verify incomes as standards tighten," says Hobbs, of the California Mortgage Bankers Association.

100% loans

Look for the return of the traditional down payment as it grows harder to find a 100% loan, particularly a subprime one. No-down loans "will still be an option for those with good credit but more difficult with imperfect credit," predicts Hobbs.

Nervous lenders are becoming acutely interested in ensuring that borrowers don't overcommit. "You still are going to be able to buy (a home)," says Cagan, "but you will be expected to put something down."

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