Mortgage hunt tough, not impossible

If you were thinking of getting a mortgage before the current blizzard of bad financial events struck, the good news is: You can still get a home loan, and, at least for now, rates have been falling.

But the caveat is: You'd better be creditworthy.

The US Treasury's takeover of mortgage finance giants Fannie Mae and Freddie Mac earlier this month signaled that mortgage money will remain available.

"The recapitalization of Fannie Mae and Freddie Mac means they will continue to provide mortgages to good credit quality borrowers and at lower rates," than before the government intervened, says Keith Gumbinger, vice president of HSH Associates, which tracks consumer loans and mortgages. In effect, "good credit quality borrowers will not be as penalized for the difficulties of their less creditworthy brethren."

Despite the undoing of Lehman Brothers, the buyout of Merrill Lynch, and the bailout of insurer American International Group, creditworthy borrowers are still being welcomed by lenders. "Most of the private firms in the mortgage market had already pulled away, leaving Fannie Mae, Freddie Mac, and the FHA [Federal Housing Administration] as really the only games in town," Mr. Gumbinger says. "That hasn't changed."

But the current mortgage and housing crises have brought much tighter lending standards. In Gumbinger's view, borrowers now should have a FICO (Fair Isaac Corp.) credit score of about 720 or higher, versus what he calls a "break point" of about 680 about two years ago. Moreover, they should be able to document their income and carry a manageable amount of debt.

"At the height of the market's boom, you might have been able to leverage as much as 55 percent of your monthly gross income to cover the amount you owed for your mortgage principal and interest, taxes, insurance, and any other debts with longer than 10 months to run. Now, that debt ratio should be no more than 43 percent," Gumbinger says.

As for down payments, most lenders are seeking a minimum of 5 percent. As of Oct. 1, the minimum down payment for a mortgage insured by the FHA rises to 3.5 percent from 3 percent. In most cases, borrowers also need to obtain mortgage insurance for any down payment of less than 20 percent.

The bright side: Those with stellar credit, a provable income stream, and the funds to make a sizable down payment, should find lenders ready to do business.

The best priced and most available loans are the traditional 30-year fixed-rate mortgage. According to Freddie Mac's weekly primary mortgage market survey for the week ended Sept. 11, average interest rates for a 30-year fixed have fallen almost 0.6 percentage points over the past four weeks to a 5.93 percent average. Rates on adjustable rate mortgages (ARMs) averaged 5.21 percent, up from 5.18 percent four weeks earlier.

While ARMs are largely out-of-favor these days, "if there is a popular ARM, it's the 5/1 hybrid ARM," whose interest rate is fixed for the first five years of the loan, after which it becomes adjustable, says Gumbinger.

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