Credit Crunching Potential Home Buyers

It has been all over the news that lenders are tightening their requirements for borrows. Even in the thick of this credit crunch, though, there's plenty of money available for home buyers – if you have good credit and a hefty down-payment. People with less-than sparkling credit and without enough of a down-payment will most likely encounter problems with getting a loan. As the credit crunch drags on and lenders try to stem the flow of additional losses even as the government tries to stimulate the languishing housing market, it can be expected that the mortgage lending landscape could get interesting. Well, more interesting.

It’s not enough to have a higher credit score, there's a good chance your lender will be scrutinizing your debt-to-income-ratio and requiring that it go lower.  Though during the housing boom lenders approved borrowers with debt obligations that surpassed more than 55 percent of their gross income, there is definitely a shift occurring in the mortgage market. In fact, Freddie Mac will require manually underwritten loans to meet a debt-to-income ratio of 45 percent, beginning in March 2009. Other lenders are expected follow suit.

The reason behind this is that many borrowers with high debt-to-income ratios did default on their mortgages. However, there may be times when a higher debt-to-income ratio is inescapable, like if a borrower has a steady base income, but relies on regular commissions that aren't taken into account as long-term income. Restricted debt-to- income requirements could also hurt borrowers who don't want to include their spouse's income in their application even though that income will be used to help pay the bills.

For many borrowers with lower incomes or high debt-to-income ratios, the Federal Housing Administration (FHA) has been their only hope for mortgage approval, because it offers low down payments and more flexible guidelines. FHA-insured mortgages will most likely represent a whopping 35 to 50 percent of all home purchases throughout the U.S. in 2008. That number is expected to remain high for 2009, but there will be some changes.

Though FHA loan limits had been increased as part of the Housing and Economic Recovery Act of 2008, the limits will expire. The act raised the number of eligible homes for FHA loans and raised the maximum loan amount in the highest-cost markets to $729,750. In the Twin Cities metro area, it meant that the maximum FHA mortgage amount for a single-family house was $365,000. That number will now drop down to $318,500 in 2009.

Another part of the HERA stimulus package included a $7,500 federal tax credit to be offered as an incentive for first-time buyers to take the plunge. The credit is available for homes purchased between April 9, 2008, and June 30, 2009. As with many home buyer programs, there are some income eligibility requirements. And it is more like a free loan than free money, as the tax credit works like an interest-free loan and must be repaid in 15 years.

There are other home buyer programs, particularly for first-time home buyers, available in many counties through the Twin Cities metro area.  Likewise, the cities of Minneapolis and Saint Paul have home buying assistance programs, including their “shared” CityLiving Program.  Depending on where in the city you are planning move to, there may even be neighborhood programs within St. Paul and Minneapolis for which buyers may qualify. 

Things are getting a little hairy in the mortgage sector.  Though the tightening credit market may be impeding home buyers without perfect credit and a substantial down-payment, there are other programs which may help you on the path to home ownership.  Though there is no guarantee, seeking them out may mean the difference between home ownership and continued renting.