A few short years ago, as long as you had a pulse, you could pretty much count on getting a 100% financed loan. Those days are a distant memory as foreclosures have taken on a life of their own and have caused many a subprime lender to close their doors.
In just this past year, newspapers and television reporters have claimed that foreclosures are up over 50%, an astronomical amount, in some areas of the country. The paramount reason for these foreclosures are because borrowers are unable to come up with extra money to cover mortgage payments that have jumped 2 or 3 percentage points at the maturity of their short term arm.
In the past, borrowers who have had a less than pristine score have still been able to get 100% financing. Those who have had a little bit better score have been able to do interest only loans with a short two or three year arm. A short term arm means that a mortgagee's interest rate will stay the same for a set period of time, maybe 2 years. After that short period of time, the lender is within their rights to raise the interest rate two or three points as per the contract and to continue to raise it every 6 months (again as per the contract) until the borrower either refinances or sells.
This is when the trouble begins for the borrower. Imagine that a $1200 mortgage is now $1700 dollars. A borrower knows that he can't afford to pay the extra $500 per month. He can try to refinance, which results in thousands of dollars in closing costs and a higher interest rate than his original loan or he can try to sell. If his loan was an interest only loan and he has not put any extra money toward the principle, he owes the lender the same amount of money as he did when he first purchased the home. If he tries to sell, he will have to put his house thousands of dollars over market value just to break even. This means that the home, now overpriced in most markets, will sit for months while the borrower continues to pay the extra $500 per month. Within a short period of time, the borrower can't make the mortgage payment and decides to throw in the towel and not make any more payments at all and foreclosure proceedings soon follow.
The house is sold on the courthouse steps for pennies on the dollar and the borrower is still liable for the loss. The loss is the difference between the amount borrowed and the amount sold plus any and all fees. Lenders will sometimes allow a short sale. This means that the lender will agree to allow the property to be sold, while still in the possession of the borrower, at a price less than what the borrower owes. The 2nd lien holder agrees to the short sale as they have been able to get more money from the borrower by charging a higher interest rate during the first interest only period of the loan. Even with a short sale instead of a foreclosure, the borrower will have a mark on his credit.
The borrower is not the only one to suffer. Many mortgage companies who agreed to finance sub-prime loans (loans in which the borrower was a higher risk due to a low credit scores) sold their loans to companies that would agree to lend the money to the borrower with the condition that the mortgage company making the loan would agree to buy back any bad loans from the company lending the money. As arms begin to mature, foreclosures become more common and the lenders lose a lot of money. They demand that the mortgage company buy back any loans that are deemed "bad" loans. The sub-prime mortgage company cannot buy back millions of dollars in loans and they close their doors. Hundreds if not thousands of jobs are lost and the economy suffers.
This is why mortgage companies are far less willing to offer 100% financing to borrowers with shaky credit. Even borrowers with good credit are now expected to bring money to the table. So if you are looking to buy a home in the near future, first know your credit score. You can find this out by asking for a free report from one or all of the big three credit reporting agencies: Experian, TransUnion and Equifax. You should be able to find the address of each online and there are a number of online sources that will walk you through getting your credit report for a small fee. You can also go to a mortgage lender and ask him to pull your credit. This will give you an opportunity to talk with the lender and figure out the price of home you will be able to afford. If you need some work on getting your credit score repaired, many times a mortgage professional will be able to tell you the steps you can take to raise your score.
In the meantime, start working on getting credit card balances paid down. If you don't use a card, call and cancel the card. A large number of cards with large credit lines hurt your score. Look at your credit report and if you find any errors, report them to the credit agencies asking them to remove or correct the problem. Make sure you pay your bills on time. Any bills that are thirty days late end up as a negative mark on your score. If you have good credit, keep it that way. Don't sign on the dotted line for anyone else and don't get credit cards that you or another party can charge on. (Unless it is your spouse and even that can be bad) Make sure that you keep a record of your credit card numbers in case you lose a card. Closing down a lost or stolen card will keep you from being the victim of identity theft.
Purchasing a home is a wonderful accomplishment and is something you should look forward to with anticipation. If you are wise and take the right steps now, you will be able to afford a home of your own that is within your budget.
