Look for the return of the traditional down payment as it grows harder to find a 100% loan, particularly a sub-prime one. While No-down loans will still be an option for those with good credit, nervous lenders are becoming acutely interested in ensuring that borrowers don't over commit. You still are going to be able to buy a home, but you will be expected to put something down.
The self-employed and those with marginal credit are the ones who will really feel the changes trying to get a sub-prime, Low Documentation (Stated Income) product. Stated Income loans were great for self-employed people that had good income, but took lots of tax deductions which, in turn, created a low NET number on their income tax returns --the very document lenders used to verify their income. This is where the most change will be concentrated in ---the riskier sub-prime market. This affects those borrowers who can't document a steady income or an income substantial enough to make payments on the loan they want. And while sub-prime products won't completely disappear, the range and availability are likely to shrink.
Finance experts reveal some major implications for homeowners in the changing lending climate. The three primary changes are:
- A sharp reduction in "no-doc" loans;
- A big reduction in 100% financing; and
- The return to strict, traditional standards in qualifying borrowers.
The return to traditional loan requirements will include ending the lender's risky practice of overloading the borrower with debt. With the recent tide of foreclosures, lenders are also seeing that when homeowners have no own money tied up in a house, it's emotionally and financially easy for them to just walk away.
Once again, Lenders want to see the borrower show commitment. Commitment = Down Payment! A down payment is a good idea for other reasons as well. By increasing the amount you put down on the Price of the home, you will lower your Loan-To-Value (LTV) ratio. This is one of the important factors that lenders use to figure your interest rate. A cash down payment will help you throughout the whole loan process. The more commitment you show to the lender, the better terms you'll receive from the lender. Another important factor is your Debt-To-Income (DTI) ratio. The less you borrow, the better your ratio.
So what kinf of loan product can you expect these days?
- Prime Lending. With a FICO score roughly above 680 and a stable income, you're likely to be a "prime" customer, although factors like DTI Ratio and LTV (the amount you want to borrow) will also enter the equation. While Experts can't agree on whether lenders are going to be even more prudent evaluating customers for prime loans, most agree that with a strong record of paying bills on time, a documented, steady income and a loan request no bigger than 80% of the value of a property, you should be able to borrow easily and at a low rate.
- Sub-prime Lending. If your FICO score is below 620, you may still get a loan, but it's more than likely to be an expensive sub-prime product.
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