Tuesday, September 4, 2007

Subprime lending crisis changes buying, selling plans

It's hard to avoid negative news about the mortgage lending business. Defaults are rising, subprime lenders are closing shop, and fortunes could be lost as mortgage-backed securities go up in smoke. Sounds ominous, but how will these trends impact someone who's trying to buy or sell a home?

The first thing to understand is that lenders are moving back to basics. No- and very low-down-payment mortgages are available only to buyers with high credit scores. This means no more 100 percent and 95 percent mortgages for subprime borrowers.

Lenders are also backing away from low-documentation and stated-income mortgages. Many lenders now require buyers to have a cash down payment, good credit and the ability to verify income.

For years, home buyers stretched the price they could pay by using adjustable-rate and interest-only mortgages. Not long ago, lenders qualified buyers for these loan products based on the lower initial rates and on interest-only payments. Now, borrowers must qualify based on the fully indexed rate and amortized payment. In other words, qualifying for a home mortgage is more difficult.

Appraisals are also being scrutinized more carefully. If home prices have dropped in your neighborhood, the lender's underwriter might knock the appraised value down 5 percent and require you to increase your down payment accordingly. Some lenders now require two appraisals. Before the credit crisis, this was required only for loan amounts above $1 million. If your contract includes a contingency for the property to appraise for the purchase price, make sure that you have underwriting approval before you remove the contingency.

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