As default rates shoot up and subprime lenders - those who make high-interest loans to people with shaky credit - close or scale back, other mortgage lenders are trying to protect themselves.
Green, who works at Duke Medical Center in Durham, N.C., fell in love with a $164,000 house. Even though her credit history suffered from large medical bills and a recent bankruptcy, she was able to get a contract on the home.
Then Green got a call from her mortgage broker telling her things had changed. She would need to increase her credit score substantially or come up with a 5 percent down payment.
Della McDowell, a broker at First Mortgage Source in Durham who is working with Green, said that some of the lenders she uses now want borrowers to have at least two mortgage payments in the bank. Others are asking for canceled checks as proof of paying rent on time. Before, lenders would simply call the landlord and get a verbal confirmation, McDowell said.
Indeed, the past few years have been marked by loose credit requirements that put people into houses with no money down and then allowed them to make only minimum payments.
Such loans fueled the housing boom. But they also came with strings attached. Most had adjustable rates: when the rates climbed, the payments soared. People suddenly found they had bought into a mortgage they couldn't afford. And with the housing market slumping, they couldn't sell or refinance.
Now they're defaulting on their mortgages. Lenders, facing huge losses, are taking action. More than two dozen shut down in the past few weeks.
Those that remain are following the stricter lending guidelines suggested by federal regulators and Freddie Mac, which buys a majority of loans. The agency said that it would only accept subprime mortgages where borrowers were qualified at the full amortized rate and that homebuyers had to be told all of the costs associated with the loans, including property tax and insurance.
Many of the mortgages offered by subprime lenders allow borrowers to make minimum monthly payments during the first few years of the loan. They were once sold mainly to investors or others with the means to afford the spike in payments.
Option ARMs, for instance, have interest rates that adjust monthly, with borrowers offered options on how large a payment they will make. The options include interest-only, and a minimum payment that is usually less than the interest-only payment. Eventually the full principal and interest comes due, and payment can increase threefold.
Dennis Pedersen, a manager with Alera Financial in Raleigh, said that many of the lenders he works with are now requiring borrowers to have at least a 640 to 660 credit score. Generally, a score of 650 or above is a sign of very good credit. People with scores at this level or higher will, all things considered, have a good chance of obtaining quality loans at the best interest rates.
Scores of 620 to 650 indicate good credit but also may point to potential trouble areas that creditors will want to look at and review. A lender may require additional documentation.
"These are just guidelines," said Peter Skillern, executive director of the Community Reinvestment Association, a Durham nonprofit that advocates fairness in lending. "Until federal regulators require lenders to make loans that the borrower can repay, (borrowers) will continue to find themselves in too much debt."
80/20 option loan: The first mortgage is provided for 80 percent of the cost of the home, and the piggyback second mortgage is for the remaining 20 percent. The 80 percent first mortgage can be a fixed-rate 15-year or 30-year, adjustable-rate or interest-only loan. The 20 percent second mortgage can be a home equity line of credit that changes with the prime rate.
Interest only mortgage: Borrowers pay only the interest portion of their monthly payment for a fixed period of three, five, seven or 10 years. At the end of that period the loan becomes fully amortized, resulting in greatly increased monthly payments.
Option ARM: An adjustable rate mortgage with the added flexibility of making one of several possible payments on your mortgage every month: minimum, interest-only, principal and interest for 30 years, or principal and interest for 15 years. If you select the minimum payment option in the early years, you should be prepared for a sudden increase when the principal and interest come due.
Generally, a score of 700 or above is a sign of very good credit. You can get your credit score from your mortgage lender. Or request it from one of the three major credit bureaus: Equifax, Experian and TransUnion.
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