The last six months have been the most tumultuous is the financial history of our country. Fannie Mae and Freddie Mac have both been placed into conservatorship, major banks have failed, Wall Street is in chaos, and the individual taxpayers have been made responsible for paying for the massive losses generated by the Wall Street/banking rescue plan that was recently adopted by Congress.
The common motive for all this activity has been to save the economy from a "meltdown" and indirectly, to make loans more available to the borrowing public. Availability of credit should stimulate the economy and create expansion, which in turn will create more jobs and turn the economy around.
But what does the crisis on Wall Street really mean for those on Main Street, especially those families wishing to purchase a new home? Royce Lewis, Loan Production Manager at Capital Mortgage Services, offers the following information to help guide would-be homebuyers:
Q: Has a borrower's ability to make a mortgage loan been affected by the problems in the banking sector?
A: Definitely! We have seen major changes in the Agency's (Fannie Mae and Freddie Mac) qualifying conditions. A borrower must be more qualified today with higher credit scores, lower debt ratios, etc., than even six months ago. Many popular loan programs have been suspended or permanently retired. The lending climate has dramatically changed.
Q: Will the recovery plan that was adopted by Congress make it easier to borrow?
A: The facts are not yet clear. Conceptually the plan was designed to create more liquidity in the lending marketplace by taking the bad mortgages out of the banking system. This should in turn make more money available to lend to qualified borrowers.
In point of fact, however, the mere approval of the plan did little to provide the anticipated lending stimulus. We have seen no relief in the tightened lending market. Many experts are blaming the lack of success on a "wait and see" attitude. Most believe that the desired results will be generated when the plan is actually implemented. Current estimates do not forecast actual implementation until mid-November.
Q: What should a person do to borrow for their home purchase?
A: The current credit conditions seem to thrive on the basic three C's of credit:
- Credit - A borrower's history with credit is probably the most important factor. A borrower must have near perfect credit to anticipate approval for a mortgage loan.
- Collateral - Gone are the days of 100 percent financing. Expect to make as large a down payment as possible. In some cases, 97 percent is still available with high credit scores and other compensating factors to enhance approval. Otherwise, conventional financing is limited because of the requirement for Private Mortgage Insurance. FHA loans have become increasing popular.
- Capacity - The basic qualifying ratios are 28/36 - 28 percent of the gross monthly income can be used for housing expenses while 36 percent of the gross monthly income can be used for all monthly payments.
Q: Does a borrower's choice of lender matter in terms of ability to access mortgage financing?
A: Yes, it does. While mortgage brokers have seen their access to funds dry up, stable mortgage banks do have resources available. In fact, while financial bail-outs have been playing out nationally, Capital Mortgage has been working locally to continue strengthening our service. With a recent acquisition of $56 million in mortgage servicing, we now have a servicing portfolio of more than $300 million. In addition, we have negotiated an additional third-party, non-agency relationship with mortgage investors to further expand our network of resources.
"The size and the health of Capital Mortgage position us well with a network of mortgage investors," explains Linda Lewis, not a broker, we offer the same professional level of service and the same access to mortgage programs we always have. As lending restrictions tighten, as seen at local banks, we still have the flexibility to secure financing for clients. We have not changed our lending philosophy at all and continue to operate at full speed with the dame can do, will do attitude and approach to lending."