Getting a Mortgage in 2010 (Mortgage Calculator Version)

US News & World Report just released its guide to the status quo of mortgages (Getting a Mortgage in 2010: 10 Things to Know). While the guide is fairly broad, it falls short on depth; I would like to summarize, simplify, and elaborate upon it below:

1. Tighter Lending Standards: Given the deteriorating credit positions of lenders, it’s no surprise that lending standards have tightened dramatically, to the point that it might now be impossible for certain parties to receive loans. Documentation has also become more strict. The days of “Liar Loans” are behind is. Instead, expect to provide verifiable proof of both income and assets, and expect that both will have to meet very rigid ratios, with very little leeway.

In addition, credit history should be impeccable (in the 730’s or above) in order to obtain a mortgage with the most favorable terms. As usual, borrowers should check their credit report in advance to make sure there aren’t any errors (you are entitled to view it free once per annum), and to scrub them accordingly. According to US News, 2010 could witness “additional belt tightening” as banks move to implement “sustainable” lending practices.

2. Lower Interest Rates: Behold one of the paradoxes of the housing market crash. While lending standards are tighter (to mitigate the perceived higher risk), lending rates are also lower (facilitating more risk taking). In other words, while lower interest rates would normally compel more borrowers to enter the market, many are simultaneously deterred because of tighter credit requirements. As a result, lending rates have continued to trend lower, following a brief uptick over the summer. They now stand at record lows.

Going forward, it seems rates must go up. The Fed’s asset purchase (known as quantitative easing) program is already winding down, and formal rate hikes probably aren’t far off. In addition, with investors nervous about the growing US national debt, they might curtail their purchases of Treasury securities, which would send Treasury yields up, and bring mortgage rates with them.

3.. Down Payments: Only a couple years ago, borrowers could purchase a house with zero money down. Not anymore. Nowadays, you should expect to put down at least 20%, which was standard before the housing bubble. FHA and other government-sponsored mortgage programs often carry less rigorous down-payment requirements, but carry higher interest rates to compensate for the additional risk. Either way, you will probably be required to obtain private mortgage insurance (PMI) if you want to put down less than 20%.

4. Government Loans and Incentives: Speaking of the FHA, it’s unclear how long its loans will be so readily available, due to its growing financial problems. It has already lowered the maximum loan amounts for reverse mortgages, and may do the same for conventional mortgages.

The other government program that you should be aware of is the tax credit for first time home-buyers. The credit has been extended until May, and most of the requirements have been loosened, to the extent that virtually all homebuyers can find some way to qualify.