Unless you have steadfastly avoided the news for the past year, you have probably heard about the “credit crunch” affecting the US financial system. This crunch, a result of years of speculative lending fueled by innovative but untested securitization strategies and massive leverage, is finding its way into the wallets of everyday Americans. If you have plans to purchase a home in the near future, here is some information that may be helpful.

First and foremost, lending guidelines are tight. Gone are the days of NINJA loans - no income, no job or assets. These days your lender will want to verify every detail of your loan application. Thus, you should be prepared for a very difficult experience obtaining a loan for your purchase.
So, what does all this mean to you as a prospective homebuyer? Here are three areas to consider.

For one, you should groom your credit prior to making a loan application. Go to www.annualcreditreport.com and obtain free copies of your credit report from TransUnion, Equifax, and Experian. Look for any information that is incorrect, especially derogatory items like late payments, collections, or judgements. The credit bureaus aggregate a ton of information and make mistakes from time to time. Make sure your report is accurate.

The number one factor in determining your creditworthiness is payment history, so make absolutely sure that you are current on all your debts and stay that way. The second most important factor is your ratio of balances to limits on credit cards. To improve your scoring in this area, work hard to pay off revolving debt while maintaining (or even increasing) your credit limits. A total of $900 credit card balances will really hurt someone with $1,000 in limits, but look excellent for someone with limits totalling $20,000.

However, for about a year leading up to your loan application, you should hold off on applying for new loans. Any time you apply for credit, your credit report receives an “inquiry”. Inquiries damage your credit, albeit very slightly. So if your purchase is more than a year away, go ahead and request limit increases for your cards. Otherwise, just focus on paying down balances.

The second area of concern for new home-buyers is capacity. Your income and assets determine your ability to make loan payments. Expect to put down a bare minimum of 3% of the purchase price of your new home. Depending on your credit and income, you will likely need 10% or more in today’s market. Don’t forget another 2-3% in closing costs. So to buy a $200,000 home, you really ought to have $26,000 in liquid savings to cover the purchase.

You will need to present solid income history to your lender. Stated-income programs where you do not verify your income are all but non-existent these days. Ideally, you will have a year or two under your belt with your current employer and have been in the same line of work for two years or more. If you are thinking about changing jobs, you may want to hold off until after buying your new home, unless the new job is in the same line of work and will pay significantly better (thus increasing your ability to qualify).

The last item of concern is collateral: the property you are buying. In many markets today, home prices are on the decline. Accordingly, lenders are scrutinizing every detail of the property being financed. You may have excellent credit and adequate income, but unable to obtain financing on the property because of the property itself. Here are some red flags to be aware of when you are shopping:

• Foreclosures. Many bank-owned homes are in pretty rough shape. While buying a fixer-upper is a great way for a young person to get into the real estate game, banks are hesitant to lend on a property that isn’t habitable. Make sure that all the major systems of the home are in good shape (roof, plumbing, foundation, electrical) before getting too excited about a major bargain.
• Unusual homes. Lenders certify the value of the home you are buying by hiring a third-party appraiser. That appraiser will use similar home sales from the past year to establish a value for your home. If the market has been slow or the home is very unusual, there may not be enough similar comps to establish value.
• Condominiums. Financing a condominium is especially tough right now. Be sure that the condominium association is relatively large and no one owner or investor holds more than 10% of the units. Review the association budget and balance sheet to make sure that there are sufficient reserves to cover maintenance of the units.

Across the country, homes prices are dropping at a fantastic rate and affordable deals are more prevalent than ever. By grooming your credit, establishing sufficient income and assets, and finding an appropriate property, you will be well poised to take advantage of a buying opportunity.

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This entry was posted on Sunday, May 25th, 2008 at 2:41 pm and is filed under Buying a Home. You may e-mail this post to a friend. You may print this page. Responses are currently closed.