Bankruptcy

Stricter Mortgage Lending Regulations Implemented

By Chris Kramer

As many people now know, the current recession was touched off by the collapse of the real estate market, which ballooned out of control in the mid-2000s.

Now, according to CBS News, mortgage lenders have learned a tough lesson and are changing the way they do business. Here?s a look at some notable changes and why they?re cropping up.

Big-Time Losses

During the subprime lending boom, many lenders (including big players like Fannie Mae and Freddie Mac) offered high- or variable-interest loans, no-down-payment loans, and other types of loans that people were unlikely to pay off easily.

Now, many of those loans have gone bad, meaning that the borrowers were unable to make payments and the houses in question have gone into foreclosure. Lenders are thus writing off (that is, accepting as lost) billions of dollars in bad debts ? and they have to do something about it.

• Credit score requirement: In the era of subprime lending, people with low credit scores were often specifically targeted for high-interest loans. Now, according to sources, Fannie Mae will not issue loans to anyone whose FICO credit score is below 620.
• Equity requirement: If you?re looking to refinance your current home loan, lenders now require you to have some equity (that is, some amount of the principal paid off) in your original loan.
• Down payment a must: In the olden days, buying a house without a down payment was unheard of; the subprime lending "innovations," though, introduced loans with no down payment required. Major lenders, it seems, are returning to the traditional wisdom that you must pay a significant amount of money up front.
• Debt-to-income ratio consideration: Fannie Mae has also reportedly announced that it will not lend to anyone whose debt-to-income ratio rises beyond 45 percent ? that is, in order to get a loan, you must not pay more than 45 percent of your monthly income on all debt payments (including car, credit card, student loan, etc.) combined.

So what does this mean for people thinking about buying a home? Basically, it means you need to be at the top of your game financially. You should be checking your credit report regularly and making sure you?re an attractive candidate to home lenders ? and if you aren?t right now, it?s time to take steps to become one.

Additional Resources

Home Buying Brochure

Full post as published by The Bankruptcy Blog on January 21, 2010 (boomark / email).