Can You Get a Mortgage?

Let's start with the good news. You can still borrow money. But you'll find that the rules have changed. Your credit record and credit score matter more than they used to, and home purchases require bigger down payments.

In late November 2008, the federal government announced two new programs to help kick start consumer lending. First, the Federal Reserve will purchase $500 billion of mortgage-backed securities. The news sent mortgage rates lower and generated a slew of calls to mortgage brokers. Part two is a $200 billion program to lend money to private investors who buy securities backed by student and auto loans, credit card debt and small-business loans guaranteed by the Small Business Administration. Theoretically, easier credit will trickle down from this program, but it may take a while before consumers see the effects. And neither program addresses the reluctance of lenders to take chances on any but the most credit-worthy customers.

You may get a better reception at the local branch of your own bank or at a smaller community bank or credit union. If you don't like the rate offered or you get turned down, keep shopping, says Keith Gumbinger, of HSH Associates, which publishes financial information and rates. "Price and access to money are widely variable. Just because a lender on one side of town says no doesn't mean it's no." Before you shop rates, request your credit reports and check your credit scores at annualcreditreport.com. That way, you can see where you stand -- and what may be dragging down your credit.

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Mortgages: Stricter rules

To get a mortgage now, you'll have to make a down payment and document that you have the income and reserves to make your mortgage payment, run your household and still handle unexpected expenses.

Subprime mortgages that were offered to borrowers with questionable qualifications during the housing boom have dried up because lenders -- and the investment firms that bought the mortgages -- can no longer count on appreciating home prices to bail out bad loans. Now most lenders (and borrowers) must play by the rules of Freddie Mac and Fannie Mae, which guarantee loans meeting their criteria so that investors will want to buy them in the secondary market.

Loans backed by the Federal Housing Administration have also regained favor as an option, not just for credit-challenged borrowers (typically those with credit scores under 620) but for prime borrowers looking for low down payments.

The FHA helped Kyle and Tracy Spear of Swampscott, Mass., north of Boston, purchase a larger home with a small down payment. In the summer of 2008, the couple had planned to subdivide their property in Boston and sell the home plus a separate lot. But the city and their neighborhood nixed the subdivision, and they ended up netting just $15,000 on the sale. For two months, Kyle, 38, Tracy, 37, and their three boys -- Kyle, 4; Tyler, 2; and Jack, 1 -- lived with friends and family to save money until they found their next home, a 2,800-square-foot house with four bedrooms that cost $540,000. They qualified for a 30-year jumbo mortgage with a fixed rate of 6.875% backed by the FHA. And because the FHA required a down payment of only 3%, they had to put down just $16,000.

Prove it. The days of "Take my word for it" are over, and stated-income loans, or so-called liar loans, are history. Lenders will ask you for at least two months of financial account statements, two years of tax returns and even verification from employers that overtime, commission or bonus income will continue.

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Lenders are also scrutinizing more carefully the ratio of your debt to income. Freddie Mac imposes a limit of 45% of all pretax income for all debt; borrowers with a credit score of 740 or better will get the best rates. The FHA's guidelines are even more stringent: Mortgage debt may not exceed 31% of your income, and total debt can't top 43%. While the FHA doesn't impose a credit-score threshold, borrowers with a score of less than 500 must have at least a down payment of 10% or that much equity in their home. FHA-approved lenders may require a minimum score, typically within the typical range of 580 to 620.

Loans with no down payment, or those that combine first and second mortgages, such as the 80/20, are also gone. Mortgages backed by Fannie and Freddie require a minimum down payment of 3% to 5%. The bigger your down payment and the better your credit score, the better your interest rate. If you put less than 20% down, you'll pay private mortgage insurance, or PMI. But here's the Catch-22: If home prices have been falling in your area, you may not be able to get PMI, and if you can, you'll have to ante up 10% to 15% for a down payment.

Congress has authorized the FHA, which relies on its own program of mortgage insurance, to take up the slack in declining markets, says Meg Burns, director of the FHA's Office of Single-Family Program Development. The FHA can guarantee loans up to the same amount as Fannie and Freddie. Through the end of 2009, the limit is 125% of a metro area's median home price, up to $729,500, and the minimum down payment is 3.5%, up from 3% in 2008.

Mortgages are still pretty affordable. According to HSH Associates, at the beginning of March the national average rate on a 30-year fixed-rate loan was 5.3%. FHA loans had a 5.4% rate; the expanded jumbo rate was 5.6%, and the traditional jumbo rate was 6.8%. Adjustable-rate mortgages offer no real advantage: The interest rate on a 5/1 ARM was 5.3%, and on a one-year ARM it was 5.4%. While jumbo rates have generally drifted downward, says Keith Gumbinger, with HSH, conforming rates should remain stable absent any new intervention by the government this spring.

Home Equity: Lower limits

A few years ago, home values were rising so rapidly that you could build a pile of equity practically before the ink was dry on your settlement papers -- and then borrow against it to pay for everything from home repairs to college tuition. But lenders have tightened their criteria for approving home-equity loans (in which you borrow a lump sum at a fixed interest rate) as well as home-equity lines of credit, or HELOCs, which are variable-rate deals that let you borrow money as you need it.

For instance, gone are the days when you could max out the appraised value of your house, minus the mortgage, or even borrow 100% when the market was really hot. Now you'll be able to borrow no more than 80% of the appraised value, less the mortgage, which is a return to a historical norm, according to the Consumer Bankers Association. In areas where prices have plummeted, such as parts of Florida, Nevada and California, the loan-to-value ratio goes as low as 60%.

Lenders are also no longer relying on "drive-by" appraisals, which amount to little more than curbside inspections. Rich Novak, of USAA Federal Savings Bank, says his company starts with an automated valuation model -- which sets values according to location -- and conducts full appraisals "when conditions warrant."

You'll need a credit score of 680 to 720, as opposed to the 650 to 680 you could get away with a few years ago. And as with first mortgages, you'll have to document income and assets. Interest rates depend on the amount you borrow and your location. Recent rates averaged about 5.3% on HELOCs and 8.8% on home-equity loans, according to Bankrate.com.