POSTED: 1:30 a.m. HST, Jan 30, 2011
LAST UPDATED: 9:12 p.m. HST, Feb 3, 2011
QUESTION: How much tougher is it now to take out a first-time residential home loan or to refinance compared with four years ago?
ANSWER: It is very tough to get a loan today. Four years ago you could buy a home with 100 percent financing, 0 percent down payment, no mortgage insurance, a credit score of 660 and debt-to-income ratio of 45 percent and no additional costs. Today most lenders will do 80 percent financing with a 20 percent down payment, no mortgage insurance, a credit score of 740, debt-to-income ratio of 42 percent and no additional costs.
Q: What can a prospective borrower do to improve his chances of getting a first-time loan or to refinance a loan?
A: The first thing I would suggest is that they go to www.annualcreditreport.com and check on their credit report. You are allowed one free credit report annually. This way, the borrower can review his/her report and see whether there are any discrepancies, oddities or derogatory reporting that could hurt their chances of securing a loan.
Q: What are the biggest obstacles for not getting a loan?
A: Credit, income and enough funds for closing.
Q: What type of credit score should someone have to get a good interest rate on their loan, and what's the best way to improve one's credit?
A: The best credit score today is 740-plus. The best way to improve your credit is to make your payments on time, try to keep your balances low and not to close any of your current accounts.
Q: How much does credit card debt factor into someone being able to get a loan?
A: The breakdown on credit reports is 35 percent for your payment history, 30 percent for the amount of your debt, 15 percent for your credit history or how long you have had your account, 10 percent for new credit you are applying for and 10 percent for the type of credit that you use (such as a car loan, personal loan, credit card, etc.).
Q: What can a person do who has good credit, has made all his payments but has either a lump sum payment coming due that he cannot afford or will soon have to make higher monthly payments?
A: Before that payment comes due, contact the lender — check your payment coupon — and let them know your situation. You might be able to make some kind of payment arrangement. But, by all means, keep making those mortgage payments.
Q: What should a person do who has both an interest-only first and second loan but has been unable to combine the two?
A: Try to at least refinance that first mortgage and get a fixed-rate loan, and look into subordinating the second loan to the new first. (Subordination would entail the second lien holder agreeing to reassume the second position after the first loan is refinanced.)
Q: What are differences between an FHA loan and a conventional loan, and who are the best candidates for each?
A: FHA loans allow buyers to place a low down payment (3.5 percent), credit criteria are not as strict and it allows a gift of funds that can be used for a down payment or toward closing costs. The downside is an upfront mortgage insurance premium fee and loan limits. Conventional loans have stricter credit criteria, require higher down payments (5 to 20 percent) and have a restriction on gifting of funds. There also is no upfront mortgage insurance premium fee.
Q: Can you explain the two terms that borrowers often hear about, debt-to-income and loan-to-value, and what are the thresholds for getting a loan using those two metrics?
A: Debt-to-income, or DTI, compares a borrower's recurring debts to his or her monthly income. (Debts divided by income = DTI). The threshold that is allowable is 42 percent. Loan-to-value, or LTV, compares the loan amount with the appraised value of the property. A loan-to value of 80 percent or less is much easier to qualify for than LTVs above 80 percent.
Q: What does a mortgage broker do?
A: A mortgage broker will gather all your documents, such as pay stubs, W-2s, bank statements and tax returns; put your loan application together; and find the best loan terms for you with different lenders. If a borrower were to do this on his own, he would have to make all the contacts himself or herself, and have credit pulled multiple times. We do all the legwork. We also monitor your loan while in progress. A mortgage broker can come to you if you are unable to meet them at your office.
— Interviewed by Dave Segal, firstname.lastname@example.org