01/26/09 — Considering a mortgage? Don't be afraid, lenders say

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Considering a mortgage? Don't be afraid, lenders say

By Catharin Shepard
Published in News on January 26, 2009 1:46 PM

The word "mortgage" might conjure up negative images in the minds of many hesitant potential homeowners, but for people with cash on hand and a good credit history, securing a mortgage now could be a wise financial decision.

Many houses are selling for unusually low prices, and taking advantage of the record low interest rate could mean saving thousands of dollars over the next three decades -- a monetary plus that will last far beyond the effects of the immediate recession.

"The rates haven't been this low in 50 years," said Steve Grant, vice president of Premier Financial Mortgage in Goldsboro. "Now is one of the best times to buy."

First, it's important to pre-qualify for a loan to find out how much money a bank will be willing to lend, he said.

And the days of unchecked lending are over, said Russ Dubisky, a spokesman for State Farm.

"Many companies, before they give out a loan, are requiring documentation that supports your income," Dubisky said.

That wasn't always the case in the past, but lenders are rethinking their strategies.

The mortgage process is mostly automated these days, Grant said. Lenders put the applicant's information into the system and the computer calculates whether the potential home buyer should be approved.

The biggest hurdle to home buying is a borrower's credit score.

"It's always been a factor in determining credit risks," Dubisky said.

Everyone should monitor their credit report, which can be done online for free or for a small fee at many lending institutions, he said.

"Be very careful in reviewing credit reports. Make sure all the information is correct," said Dubisky.

Checking credit reports frequently is one way of catching identity thieves. Errors or false charges on a credit report could mean a mortgage won't be approved through no fault of the prospective borrower.

A clean credit report means a good credit score that will help secure a mortgage more easily, but what is a "good" credit score?

"I do a lot of (Veterans Affairs), so VA will go down to 600," Grant said.

But for most borrowers, 660 is the minimum credit score that banks will accept, and that won't be without some repercussions.

"You might take a hit on the interest. It depends on why," Grant said.

People with a satisfactory score should work hard to maintain it by paying bills fully and on time.

"Make sure they are not behind on anything or have any late pays," said Grant.

But people with a few missed bills or an old collection action still on their credit report can take steps to improve their credit. Even if a computer system rejects a mortgage application, occasionally lenders will take a second look.

"They still can sometimes put a loan together, if they see some redeeming factors," he said.

One common mistake people make when trying to repair their credit is paying off and then closing credit cards. While it's good to pay them down, closing them can actually hurt credit.

"Leave the account open," said Grant. "The longer it's open, the higher the score."

Just because it's open doesn't mean it should be maxed, however. If a card is carrying more than half the limit, that can negatively impact credit score almost as much as an unpaid bill.

"Then your score comes down," said Grant.

Student loan debt is a big concern for many younger or first-time home buyers, especially those who haven't been out of school long enough to make a dent in their loans.

But even people with student loan debt can still get a mortgage. The same is true for people with credit card debt.

"It's more based not on how much debt you have, but how you manage it," said Dubisky. "Manage debt, pay bills on time."

Beyond having a good credit score, there is one other factor that has become increasingly important lately.

"The best advice would be planning for the down payment," said Dubisky.

Expect lenders to require a minimum down payment. Gone are the days of 100 percent financing.

The minimum down payment on a home tends to be between 3 percent and 5 percent, depending on the lender. If the borrower doesn't have that much cash on hand, it can come from another source without affecting the bank's decision to approve the mortgage.

"The 3 percent can be gift money from a relative," said Grant.

Scraping up the cash for the down payment and cleaning up credit history can be challenging, but in years to come, potential homeowners might see it as a comparatively small price to pay.

"It's State Farm's position that with the decline in mortgage rates, we're seeing increased affordability for consumers," Dubisky said.