Equity Now

A home buyer's market? Hardly

Buyers have a tougher time getting loans these days, but there are several ways to improve your chances.

By Liz Pulliam Weston
(excerpts)

A home buyer today needs to have nerves of steel.

Tumbling home prices, stiff credit standards, gun-shy lenders and spooked appraisers have combined to make even routine transactions treacherous. It's not that deals aren't getting done -- they are -- but buyers face conditions that have changed dramatically in less than a year.

If you're going to wade into this maelstrom, you should know what you're up against and how to increase the odds of getting the home you want.

The housing market today is afflicted by two interrelated factors:

A credit crunch resulting from the bust of the subprime lending boom.
Falling home prices.

Not every area has seen prices decline, of course. The Seattle, Portland, Ore., and Charlotte, N.C., markets have remained resilient, and even in stricken cities, home values are still rising in some neighborhoods.

Average numbers don't quite tell the whole story, cautioned John Karevoll of DataQuick Information Systems, which tracks real-estate data.

Home sales have slowed overall, but sales of more-expensive homes are down dramatically, Karevoll said. Deals involving homes worth $500,000 or more in California, for example, are "at about half the level they were in August," he said. Without those higher-end sales to buoy the numbers, the median prices in many areas have fallen more dramatically than they would have otherwise. It's a kind of statistical glitch, if you will.

The jumbo question
Of course, the reason high-end home sales have slowed so much is important to potential buyers and sellers of these homes. Let's explore that.

Mortgages fall into two broad categories, conforming and jumbo:

Conforming loans are mortgages of a certain size (currently $417,000 or less), most of which are purchased and resold to investors by Fannie Mae and Freddie Mac, the two big home loan agencies that also offer a guarantee if borrowers default.
Jumbo loans are those exceeding that conforming loan cap. They're not purchased by Fannie and Freddie, but until the recent past they were bundled and sold to other investors.

For months, though, the jumbo-loan market has been all but frozen. Investors who were once eager for these loans have been scared off by the rising delinquency rates of subprime loans (those made to folks with troubled credit), said Michael Moskowitz, the president of Equity Now, a New York mortgage lender. The investors worry that borrowers of bigger loans soon will default in droves.

Instead of jumbo loans being one-eighth to one-quarter of a percentage point more expensive than conforming loans, lately they've been 1 to 1.5 percentage points higher. On a million-dollar loan, that gap could boost the payment by $800 a month or more.

MSN Real Estate: How the slump limits home buyers' options

Rather than pay those high rates or meet the stiff criteria for getting the loans, because lenders now often require a fat down payment and high credit scores, many potential buyers are simply sitting on the sidelines, waiting for the jumbo-loan market to loosen up.

The situation is likely to improve if Congress temporarily raises the caps on conforming loans. The proposal that's part of the economic stimulus package would allow Fannie and Freddie to buy loans worth up to 125% of an area's median home price, subject to a $729,750 cap. That could lower rates on affected loans by a percentage point and stimulate sales. But buyers still are likely to face other hurdles. Let's look at those.

Factors you control
Lenders assess you in three primary ways:

Your credit scores.
Your down payment.
Your income and your ability to document it with tax returns and other proof.

Jim Cramer on the home market
The 'Mad Money' TV host advises against making a purchase right now.

At the height of the lending boom, you could be zero for three -- lousy credit scores, little or no down payment and unable to prove your income -- and still get a loan. Today, "you better be two for three," LendingTree.com's Svinth said. Good scores, a down payment of 10% or more and a steady, provable income put you in the best position to get a loan.

The requirements for credit scores have changed the most significantly.

FICO credit scores range from 300 to 850. Mortgage lenders typically pull borrowers' scores from each of the three major credit bureaus -- Equifax, Experian and TransUnion -- and base their rates and terms on the middle of the three scores. In the past, FICO credit scores of 620 and below were considered subprime, which meant getting a loan would be more difficult and expensive. At the height of the boom, some lenders lowered that bar to 580.

Today, 660 is often considered subprime, and any score below 680 is likely to result in higher rates and tougher terms.

A year ago, you didn't need any down payment to swing a home purchase. Today, only a few lenders offer 100% financing, and you need sterling scores and solid income to get those deals. Otherwise, 5% down payments are typically the minimum required.

Factors you don't control
The final piece of the puzzle is the appraisal. Once accused of inflating valuations to appease buyers and lenders, appraisers are now under pressure to be conservative when assessing a home's potential value.

Matt Hackett, Equity Now's underwriting manager, said many deals are threatened and some fall through when the appraisals come in too low or an investor rejects the appraisal because the "comps" -- sales of comparable properties used to evaluate the home -- are more than 3 months old.

"In a lot of these areas, homes are sitting on the market for six months at least," Hackett said. "There are no comparable sales within three or four months."

There's also the issue of the "haircut."

In certain declining markets, mortgage experts said, Fannie and Freddie chop 5% off the amount they will lend on a house. If the appraisal on the home you want to buy is $300,000 and you have a 10% down payment, for example, you'd normally get a loan for 90%, or $270,000. In declining counties, though, Fannie and Freddie instead will lend you 85% of the appraised price, or $255,000.

You either have to come up with extra cash, Svinth said, or arrange a secondary loan in these areas (mostly in California, Arizona, Nevada and Florida).

Before you make the leap
Given the state home markets are in and based on input from these experts, here's my best advice for potential home buyers today:

Consider waiting. I'm not a fan of trying to time any market, but buying as real-estate prices are still falling takes a special kind of guts. If you're prepared for your home to continue losing value, your finances are in great shape and you plan to stay put for several years, you can go ahead and buy. In most markets, though, there's little penalty for waiting until prices start to recover, especially if you use the time to build your down payment and improve your credit scores. If you could benefit from the higher caps on home loans, that's an extra reason to put off buying until Congress acts.
Whip those credit scores into shape. Read "7 fast fixes for your credit score" for techniques to boost lagging numbers. If your scores are good but could be better, consider paying down credit card debt and not using more than 10% of your cards' limits at any given time. It's particularly important not to open or close accounts when you're trying to improve your scores.

Jim Cramer on the home market
The 'Mad Money' TV host advises against making a purchase right now.

Build your down payment. The more cash you can bring to the table, the better the loan you'll secure. Shoot for 5% as your minimum, but 10% is even better, and 20% is great if you can swing it.
Identify your reserves. Lenders like to see that you'll still have money left over after making your down payment; that gives them a comfort level that you'll be able to cover your mortgage payments even if you suffer a temporary setback. Cash in a savings or money market account is good, but so is cash value in a life insurance policy or investments in a nonretirement account you could easily sell. You don't necessarily need to turn these resources into cash by borrowing or selling, but you should include them among your assets when filling out mortgage applications.
Work with an experienced loan officer or broker. The mortgage lending situation right now is changeable and sometimes chaotic, so you'd be smart to have an experienced hand guide you through the process. Ask for referrals from friends and others you trust.

Liz Pulliam Weston's new book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Published Jan. 31, 2008

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