Friday, January 8, 2010

What's In Store for Mortgages in 2010?

2008 was the year of the foreclosure when we saw record numbers of defaulted home loans and people simply walking away from their homes. 2009 was the year of refinance with interest rates hovering at insanely low rates in the low to mid 4% range. 2010 appears to be the year of the home purchase.

The Federal “First Time Homebuyer Tax Credit” program was extended until the end of April and already this stimulus seems to be having the desired affect on depressed housing markets across the country. Locally, this program continues to encourage first time home buyers to jump into the market. And with the addition of the $6,500 tax credit for subsequent home buyers the hope is that the housing market will be more brisk, at least for the first half of 2010.

What shape is your financial house in? Until just a few months ago the best home loans required a minimum credit score of 720. Most lenders now require a minimum score of 740 for the best rates. And for folks who have these scores need to be prepared to provide their lender with more documentation than ever. Higher credit scores will still open the door to the lowest interest rates, but before the lender will let you have the rates, even people with ultra high scores will be required to provide more documentation than ever before.

The days of the no-doc or low-doc home mortgages are gone. Borrowers with high credit scores used to be able to “state” the income they made and still get great rates. Not any more. Borrowers with scores in the 800’s are now required to validate every dollar of income and assets before being approved for a home loan.

Your credit scores may be fine, but what is your debt to income ratio? An easy way to discover this number is to add up all the monthly payments showing on your credit report and divide that number by your gross monthly income. If that is above 40% that could limit the amount the lender is willing to extend to you.

What about a down payment? In the housing hey-day, home buyers routinely put nothing down to buy their home. 100% single loans were an every day happening. Other buyers stacked piggy-back loans to avoid mortgage insurance. Now in all but a few instances, 100% financing is gone. Lenders require most home buyers to bring a minimum down payment to closing. FHA still requires a relatively small 3.5% down payment and many lenders still require a minimum credit score of 620 to qualify.

Other conventional financing may have slightly lower interest rates, but also require a more substantial down payment of 10% or more. For those home buyers who are “rolling over” the equity from their existing home, this won’t be an issue.

The down payment hurdle can be made easier by the generosity of family who, in certain circumstances, can “gift” that amount to other family members purchasing a home. The gift must come from a bone-fide family member who must also sign a letter declaring the money to be a gift with no repayment required. Check with your own lender for the specifics of the gifting of down payment monies.

Is the timing right for you to buy? If you are considering the purchase of your first home you should plan on owning that home for at least three to five years. Some experts believe that housing prices still have a way to fall before they turn around. Our local market doesn’t seem to support this concern, but just to be on the safe side, it would be wise to buy the home only if you plan on living there for at least three to five years.

If your plan is to buy a home, fix it up and sell it within a year or less, you had better find the right house for the right price and know what you’re doing. Even the pro’s in years past who made their living “flipping” houses aren’t doing much of this type home buying.

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