Tuesday Tips: Credit Crunch Goes Back to Basics

5 Jul

As a prospective home-buyer or current homeowner, should you be considered about the current credit crunch? Yes!

The mortgage industry is in a “state of correction”. In other words, we are reverting back to the “basics”. Those potential buyers who have a good credit score will still be able to qualify in today’s market.

Even borrowers with great credit, however, are still being scrutinized. When you think you’ve submitted every document the lender has asked for, they will usually add more documents that they need. This is normal!

Current mortgage guidelines are established by the government agencies that purchase the loans from approved lenders. “Conforming” loans will continue to be a mainstay of the mortgage industry. “Conforming” loans consist of loans with full documentation and qualifying credit scores. On the other hand, “non-conforming” loans are the types of loans that have created the volatility in today’s market, such as no-doc, stated income/stated assets, negative amortization, and even stated credit.

Five years ago, the qualifying credit score was 720 for “non-conforming” loans. It eventually went down to 600. Countrywide offered “Fast & Easy” loans for those borrowers with a 600 score. “Fast and easy” meant that if you had a score of at least 600, you could “state” your income without verifying it and be able to obtain a mortgage approval. These loans obtained under false pretenses do not conform to government guidelines and therefore, are purchased by investors. The prelude to the credit crunch was the “sub-prime” meltdown. These loans were provided to consumers with low credit score, very little money for a down payment, and at a much higher interest rate.

Once the delinquency rates and foreclosures started to skyrocket on this segment of mortgages, the investors decided it was time to fold their tents and leave, taking with them numerous “bankrupt” sub-prime lenders.

In conclusion, the credit crunch will eventually subside and as we revert back to the basics, the mortgage industry will survive and become even stronger and as a result, the home buying consumer will be even better served in the future.

*I’m a licensed mortgage loan officer in the State of Delaware. Please email me or leave comments if you have any questions.*

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