Credit Crunch, What Credit Crunch?

I bought my first home in 1992. When I bought my home I was warned of two things, #1) don't buy it unless you are going to live it in for five years and #2) be prepared for the mortgage company to look at every hair on your body with a microscope.

Now I can't believe how long ago that has been and today I find myself reminding myself of that experience when working with both buyers and sellers. Buyers get it #1; real estate is a long term investment. The difficulty I find is that so many of my clients are making very subliminal decisions based on unconscious assumptions that the mortgage or refinance process is going to be easy based on recent experience.

At GMAC, I learned the three golden things that are looked at when a loan officer considers a loan approval. #1) the borrowers desire to pay, this is illustrated via a credit report and an established history of good credit practices like making your payments on time and not overextending yourself by maxing your lines of credit out. #2) the borrower's ability to pay, what is the debt to income ration, can the borrower afford what they are about to borrow? And finally #3) the condition of the collateral, is it worth securing the loan? Can the bank sell it at a profit if the borrower defaults and the collateral is reposed or foreclosed?

If you are thinking about taking a loan out for a home purchase or refinancing, these are the things you need to know in the way it relates to the credit crunch of today's mortgage market.

#1) a good credit score (also known as a FICO score) is essential. If you have questions about your credit score or would like to know how you can improve your credit score, check out this helpful site: http://www.myfico.com/CreditEducation/CreditScores.aspx it's a good idea to know what your score is before talking to mortgage brokers. That way you can tell them your score and save the hassle of running your credit report until you've decided that you want to work with that mortgage broker.

#2) your ability to pay. It's easy to determine your debt to income ratio, first add up all your monthly recurring debt like car payments and minimum credit card balances. Next add the amount of your desired new house payment. Separately add up all your household income (to include your spouse if you are married). Divide your total monthly debt by your gross monthly income to determine your ratios. See the example:

	Total amount of new house payment:	$1750
	Total amount of monthly recurring debt:	$400
	Total amount of monthly debt:	$2,150
	Borrower's gross monthly income (including spouse, if married):	$5,350
	Divide total monthly debt by gross monthly income:	$2,150/$5,350
	Debt to income ratio:	40.18%

It's also a good idea to know what your ratios are before talking to mortgage brokers. And as you share with your mortgage broker what your ratios are, they can start giving you sound advice based on your individual situation.

#3) The collateral. In real estate, banks use appraisers to determine value. And today, it's likely in King County that you're appraisal is going to be much lower than you would like or expect. Also be prepared that the loan underwriter may ask for repairs be done on the home prior to giving final loan approval and if they question the value, it's not uncommon anymore in real estate to see a second appraisal ordered.

So where to start? First learn your credit score, determine your debt to income ratios and then call your mortgage broker to advise you on your particular situation. As always, if you need a good recommendation for the Renton area, please let me know.

Jana

http://www.janaschmidt.com