The New Loan Environment

The 2008 real estate bust led to the “Great Recession.” Banks were lending 100% on homes to people who couldn’t afford it.

The issue was that everyone believed real estate would always go up and that everyone should own a home.

The reality is that home prices don’t go up forever and eventually the bubble burst.

Just as with any regulatory environment, when times are good, the rules get loose. Times have changed and now the pendulum has swung too far the other away. While interest rates are still near record lows, mortgage loans are harder to obtain. What can you do to make it an easier process for you?

First, check your credit score. You should do this long before you begin the process of looking for a loan. This will give you time to correct mistakes or improve upon your credit record. It is vital to make all payments on time and use credit. This means charging things on a credit card and always paying it off every month.

This shows an ability to use credit intelligently and responsibly. It is important to keep your oldest credit card open. This maintains a long credit history on your statement. In addition, different kinds of credit are important. Paying for a car loan, student debt and any credit cards (revolving loans) will contribute to a good credit score.

In contrast, don’t overextend yourself with loans or credit because taking on too much is never a good idea. Having a good credit score will help you get credit, a lower interest rate and can even help with getting insurance. It is always in your best interest.

When looking for a house, really take a hard look at your budget. Your dream home may be out of range and the bank may be willing to give you a loan that will stretch your budget. It is better to go for a loan that is less than you can afford.

Don’t forget to include taxes, upkeep and insurance in your equation. Also, keep in mind that at such low interest rates and with the expectation that they will go up, a fixed rate loan is the only thing that makes sense right now.

When you do find a home, check comparable homes recently sold in the neighborhood. The most expensive home in the neighborhood may not be appraised high enough to cover your loan. Banks now have to hire outside appraisers who may not know the area, particularly State College. It seems to be one of the major issues with house loans: the appraisal doesn’t come in at the agreed upon purchase price so the loan is not approved.

It is important to have a down payment for the house that you want. Twenty percent is necessary in the current environment; it will help in getting a loan and a better interest rate. Here, you’ll want to start early and put money in a savings account to prepare for buying a home. You will need the 20 percent down payment plus additional money to cover any closing costs, furniture and other expenses that come with owning a home.

When the time has come to begin looking for your home, a pre-qualification letter from your lender of choice will pave the way. A seller and real estate agent will want to know that you have the ability to get a loan that’s big enough to cover the price of the real estate they are showing you. Having this letter doesn’t make getting a loan easier but it does help a seller and real estate agents take you seriously.

The bottom line: when you find the real estate you want and your offer is accepted, that’s when the real fun starts. Be ready to sign forms in triplicate, prove your income (particularly if you are self-employed) and hit many speed bumps along the way.

It’s a long process, so be sure to give your lender plenty of time for approval before close. To speed up the process, getting the bank any documentation it needs immediately can help. You will need your W-2s and pay stubs to prove your income. There will be plenty of requests and be prepared for anything.

For an underwriter to approve your mortgage, all the right boxes need to be checked, all t’s must be crossed and i’s dotted. I think soon they will need blood drawn and fingerprints taken. Scratch that – I better not give them any ideas.

A final thought is to work with people you trust. Try to use people in town who are reputable real estate agents, attorneys and lenders. Working with people who are in your corner can make a world of difference.