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Back to the Future - Tighter Underwriting and What Home Buyers can Do to Help Themselves in Spite of the Changes

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Mortgage and Lending

In the mortgage industry, the present is looking more and more like the past. Back in 1992 when I first got into the mortgage business, George Bush was finishing his last year in office (though he didn't know it at the time), a Clinton was running to take his spot and Brett Favre had just been picked up by the Green Bay Packers. A lot has happened in between, but another George Bush is finishing his time in the White House, another Clinton is running for president and now that Favre has finally retired he is threatening to un-retire and continue his reign of terror against our beloved Chicago Bears. In the mortgage Chicago area mortgages best rates on Chicago mortgagesindustry the future is looking a whole lot like the past, too. Back when I first started there were two types of loans which covered the majority of lending options - conventional and FHA. Conventional mortgages were for those home buyers who had strong credit and a good down payment. FHA was for everyone else.

Back in the day, we put together loan packages which highlighted the strengths of the borrower, and showed that they met all the guidelines in regards to credit, income, job stability and having enough money to close, as well as a full detailed appraisal. With changes in technology and a strong national real estate market, mortgage underwriting loosened up a lot. The credit score became the biggest factor in the approval process. With a high FICO score lenders would overlook weaknesses in other areas. It got to the point where some of the biggest wholesale lenders were doing most of their business taking on loans where the borrower stated their income and assets without proving the figures were true. (Even the appraisal guidelines loosened and many loans were approved with just a drive by appraisal, or a computerized estimate of value.) These loans were sold as a way for well qualified borrowers to cut down on their paper work and to streamline the loan process. Unfortunately, this opened the way for abuses and led to "Liar's Loans", and some people who bought way over their heads, and couldn't afford to make their payments.

It wasn't until property values declined (not so much here in the Chicago area, but very sharply in some areas of the country) that the abuses in the system really showed. When home prices were moving up borrowers found a way to make the payment, even if it was by borrowing more against their home. Now loan defaults are up and mortgage lenders have found that old time religion again. This means we are back to the old ways of doing things, tighter underwriting for everyone, and FHA is again the best option for many borrowers and first time home buyers.

So what can you do if you are planning on buying a home or refinancing your mortgage and you want to make sure you present your self in the best light? Here are a few things you can do ahead of time to improve your chances of getting a loan at the best rate and terms:

  1. Focus on your credit - One thing that hasn't changed is that your credit score and your credit profile are still a crucial part of the loan approval. Make sure you review your credit before you need a loan. If you have problems, work on them when you still have time to get them fixed. Here is a series on credit that will help you understand your options, and show you how to increase your credit score.

How to understand and improve your credit score-part1

How to understand and improve your credit score-part2

How to understand and improve your credit score-part3

How to understand and improve your credit score-part4

2. Address problems up-front - If you have had problems of some type in the past, don't try and hide them. In the mortgage process we look into all the information you present and verify everything. But some things that you may think are huge problems we may be able to work around. For example, if you have credit problems from the past that are hurting your credit score, FHA can still be an option. The key here is to show that you have moved beyond these problems and they are no longer an issue. To show this you will need to write a letter addressing any credit problems that show up on your credit report. In the letter you need to explain what happened, what you have done to correct the situation and why this isn't a problem anymore. If you have any documentation to help your case, provide it. The same applies for other problems like job gaps and

Chicago area mortgage best mortgage rates3. Put together your documentation - The days of the no-doc loan are gone, so you will need to have documentation proving you make enough income to afford the mortgage payments and you have enough money or other assets to pay for the down payment and closing costs. This usually means putting together some simple documentation. In some cases we can get by with less, and in others we will require more, but this is a good list to start with -

W2s for the last 2 years (in some situations we will need full tax returns),

Your pay stubs for the last 30 days

Bank and investment statements for the last 60 days with all pages attached.

4. Have a plan - Do you know how much of a payment you can afford? Do you know how much cash you can come up with for a down payment and closing costs? There are still ways to buy with little or no down payment required, and there are ways to buy with no closing costs. If you have money to put down, where is it coming from? Will you still have money left over afterwards for other purchases or emergencies? You need to think about these things before you look for a home and applying for a mortgage. The answers to these questions will help you to decide what to look for and how you will finance it.

5. Get pre-approved for a mortgage - With all the changes in the mortgage market this step is crucial. A mortgage pre-approval will tell you how much of a loan you can qualify for and how much of a home you can afford. A good loan officer will take it a step further and help you to figure out the best way to structure your financing so it meets your long and short term needs. And if there are any problems, a good loan officer can also give you advice on how to put yourself in the best position to buy a home, if not now in the future.

The mortgage industry might have gone back to the past, but if you make a plan and follow through, there could be a new home in your future.

Pete Thompson is an Illinois mortgage banker who provides superior mortgage service and competitive mortgage rates in Chicago, the Chicago area and throughout Illinois. Click here for a Free copy of The Real World Home Buyer's Guide - How to Save Thousands when Buying a Home and Getting a mortgage. For information on the latest mortgage news and current Illinois mortgage rates, please visit http://www.illinoismortgageratesandnews.com/

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