What’s happened in the mortgage industry? Can you still get a new home mortgage or refinance your existing home mortgage? Why is all the news about the mortgage industry such doom and gloom?
Well, let’s take a look at all this more closely. Before the resent sub-prime fall out a buyer with a credit score of 580 and a somewhat poor credit history could get 100% conventional loan financing on a new home. The sub-prime lender was willing to take a chance on the buyer because they would be collecting a much higher interest rate on the buyer who had the lower credit rating. Often times the seller would either pay all of the closing costs or it would be rolled into their loan. Therefore, the buyer was able to move into a home with little or no money out of pocket.
A number of these buyers were only able to get approval for an adjustable rate mortgage (ARM). This meant that their rates and house payments would go up in one, two or three years, depending on the ARM program for which they had gotten approval.
The mortgage lenders would instruct these buyers to be sure and make their payments on time which would definitely improve their credit scores and then they would be able to refinance and get a better fixed rate mortgage before their ARM rate would adjust upward for the first time.
Loans for buyers in this category were considered sub-prime loans. For some lenders their total portfolio of loans was made up of sub-prime borrowers.
So what happened? The percentages didn’t work out. Not enough of these sub-prime borrowers were able to meet the commitment of their new house payments which eventually lead to foreclosure. Some of the borrowers where able to keep their payments made, but not on time. So with the late payments their credit scores did not improve as they had hoped. Therefore, they were not able to refinance before their ARM rate adjusted and their payments when up. At that point, these borrowers also went into default.
Simply too many of the sub-prime borrowers went into default for those lenders whose total portfolio was in the sub-prime market. Therefore, a number of these type lenders were forced to close their doors.
That is not to say that a large percentage of these sub-prime borrowers did not and are not currently making their payments on time and proving that they were worth the chance that the lender took on them. It is just that a large enough percentage of them did not and the lenders were forced to have too many foreclosures on their books at one time in order to still make a profit and stay in business.
As a result the bar has been raised for the buyer wishing to get a new mortgage loan today. Lenders now want a little more proof that a buyer is truly taking solid steps to rebuild their credit worthiness. Today a borrower generally needs a credit score of 620 to get a one hundred percent conventional loan on a new home purchase. In addition, their whole credit history is scrutinized more thoroughly by the lender.
This has impacted the real estate market because a pool of buyers that were once available have now reverted to renters. If sellers can’t find buyers, then they can’t become buyers themselves as they want to upgrade.
For people who have always had good credit very little has changed. Those people just need to go about business as usual. But, as we said they may have problems selling their current home because of the reduced size of the buyer pool.
For those who have previously had some credit problems and really want to buy a house you just need to take steps to improve your credit score and you too can still have a home mortgage loan.
If you are sincere, you can fairly easily improve your credit worthiness. Start by simply reviewing your credit report. There may be items on the report that have been paid but not reported properly to the credit bureaus. There may be items that are not even yours, especially if you are a Jr. or Sr. Some items may belong to your son or father that may be negatively impacting your credit score. Your credit report should not be a mystery to you.
There is a large segment of the population that falls in the borderline credit worthiness range. A lot of these buyers are still worthy of home ownership. At this point in the mortgage loan industry buyers either have to improve their credit scores and credit history or the mortgage loan industry has to find a way to still accommodate people who have little down payment money but can still make a monthly house payment.
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