Straight-talk on the ‘Mortgage Credit Crunch’

While many recover from tryptophan-induced food comas over the next few weeks, the looming question is bound to return:

What’s going on with the mortgage market?

Realistically we may see a few more after-shocks but most analysts agree that the major changes to the home loan industry have likely run their course. For homeowners and buyers in the greater Seattle area, where does that leave us?


Now that the days of 100% financing without proving any income or assets are behind us for the foreseeable future (maybe ever), it's time to get back to the basics. From the qualifying perspective, there are three areas to analyze: income/assets, credit, down payment. Below are some considerations for each (subject to change without notice of course).

Income/Assets: This is more of a priority than it has been for the past several years and revolves around the extent to which the borrower can document your income. The more income you can satisfactorily document, the more flexible the underwriting guidelines will be on credit score and down payment.

Especially if income is not easy to document, asset verification is playing a bigger role than in recent history. There are still programs that will allow for no down payment AND no money left over in the bank (which is known as 'reserves'); however, income documentation will be required. In addition, if you want to qualify for more loans regardless of income, having at least 2 months worth of the mortgage payment (and in come cases more) will help. Plus it just makes sense to have something to fall back on before you finance hundreds of thousands of dollars...

Credit: This is now more significant than in recent years as well -- in fact, one of the reasons why changes in the mortgage and banking markets have been referred to as a 'credit crunch' is because qualifying credit scores have gone up moderately. This impacts qualifying on multiple levels, and is the primary reason for reviewing your credit immediately, even if you are planning to buy some time in the future.

Down Payment: The biggest change to zero or low-down payment loans revolves around 2nd mortgages -- the "80/20" loan is no longer an option (with a few exceptions). Private Mortgage Insurance (or PMI) is still viable at this point and there are a number of different programs to consider. If a down payment is an option, even 3% makes a substantial difference in the number of loans available. 5% or 10% down are the next milestones from a qualifying perspective so if that's an option or if you have a direct family member who is willing to provide a gift for the down payment, it's worth considering.


A note for current homeowners: if your adjustable rate mortgage is not immediately up for its first (or next) adjustment, with fixed rates hovering around 6% it's crucial to consider the timing of a potential refinance if that's something that is going to be a priority in the next few years.

Final Note: If you haven’t taken a close look at the information on your credit report within the past 6-12 months, make it a priority to do so right away. The time to make positive changes to your credit profile is prior to qualifying for a home loan. Some changes take longer than others to result in a benefit.

You can request a copy of your credit report from each of the three major credit bureaus online at www.annualcreditreport.com once per year. I’m also available for a free ‘mortgage check-up,’ which includes a copy and analysis of your credit report.