The shakeout in subprime mortgage lending is rippling throughout the economy, affecting the stock market and individual borrowers alike.
It’s hitting borrowers across the spectrum, making it extremely difficult to get subprime loans – mortgages for borrowers with spotty credit or irregular income – and causing rates to soar on “jumbo” mortgages of $417,000 or more.
Underwriting guidelines -- the rules lenders use to decide who qualifies for loans and at what interest rate – are a moving target, changing often as lenders try to reduce their risk and respond to guidance from government sponsored enterprises Fannie Mae and Freddie Mac.
“It’s almost like it was 15 or 20 years ago as far as qualifying,” said Scott Keegan, executive director of the National Association of Mortgage Professionals.
As the guidelines change, some borrowers may qualify for a certain loan on one day and not qualify the next. One way to protect yourself is by asking your lender to lock in your interest rate when you apply for a mortgage loan.
Or, consider applying for a low-interest loan backed by the Federal Housing Administration of up to $300,000. Lenders may issue FHA-backed loans to borrowers putting as little as 3 percent down on a home.
Impact varies among borrowers
People with good income and credit – credit scores higher than 720 – who can pay at least 10 percent down and can document their income and assets are considered the least risky borrowers and should still be able to qualify for standard mortgage loans, experts say. Underwriting standards remain relatively stable in the prime market, Keegan said.
But for the time being, someone with a credit score of 660 or below has very little chance of qualifying for a mortgage loan, Keegan said. That’s subprime territory, and very few lenders are willing to venture there, he said. Borrowers who have decent credit scores but irregular or undocumented income also might find it harder to get a loan at a desirable interest rate.
Borrowers who counted on refinancing before the interest rates on their adjustable-rate mortgages (ARMs) adjusted could find that they no longer qualify for a loan. The higher interest rates that kick in when most ARMs adjust could leave some owners unable to afford their monthly house payments.
Because the subprime lending shakeout comes as home values are falling across the country, it’s also getting harder for people to sell their home, pay off their loan and avoid foreclosure. This is especially true for borrowers who got interest-only loans, bought at the height of the real estate bubble or haven’t owned their homes long enough to pay down much of the loan principle.
“If you need to refinance or you’re going to be in trouble, immediately call your lender and try and negotiate,” Keegan says. The lender might be able to work out something on payments, or enter into a repayment agreement for missed payments. There are also several reputable nonprofit organizations available to help homeowners, including the Homeownership Preservation Foundation: 888-995-HOPE, www.995hope.org.
And remember, if you’re worried about making your mortgage payments or potentially losing your home, the sooner you act to get help, the better.