Getting a Mortgage Is Harder These Days

Looking for a mortgage these days?

Be prepared to show more documents and jump through more hoops as banks tighten their standards after the fallout from the subprime market.

That's not to say that it's necessarily harder to get a mortgage these days for people with good credit.

Banks and other lenders are just requiring more verification of income and assets before giving the final sign off on a loan.

"If you are the prime borrower, you'll still be able to get credit. There's plenty of capital available out there. The terms will probably be a little tighter but not dramatically so," said Doug Duncan, chief economist for the Mortgage Bankers Association, an industry trade group.

However, those whose credit isn't so good might run into some problems.

"Clearly, in the subprime space things are tightened up. There is no doubt about that," Duncan said. "Some borrowers who a year ago would have gotten a loan, today won't be able to get a loan."

Lenders in that subprime market expect business to fall off by 30 percent to 50 percent, Duncan said. The association's own forecast projects a 30 percent decline.

Federal Reserve Board Chairman Ben Bernanke spoke about the subprime market Thursday in Chicago.

"We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system," Bernanke said. "The vast majority of mortgages, including even subprime mortgages, continue to perform well."

Bernanke added, "We at the Federal Reserve will do all that we can to prevent fraud and abusive lending and to ensure that lenders employ sound underwriting practices and make effective disclosures to consumers. At the same time, we must be careful not to inadvertently suppress responsible lending or eliminate refinancing opportunities for subprime borrowers."

What Should Borrowers Do?

Duncan had several tips for potential borrowers.

First, if you've got any credit blemishes, you need to fix them. That starts with getting a credit report to see what the three rating agencies say about you.

Next, gather your documents. Be prepared to show that you have savings and can verify your income with W-2 forms and other documents.

Finally, be prepared to clearly demonstrate timely payment on other debts.

Duncan said that borrowers shouldn't just settle on the first mortgage lender they talk with.

"Shop, shop, shop. There are more than 8,000 lenders out there," he said.

While the criteria has tightened, Duncan said it's not like the market has dried up for most potential homeowners.

"Lenders still want to make loans. They don't make any money if they don't make any loans," he said.

The tightening of mortgages is hitting some markets harder than others.

Leslee McKenzie, of Coldwell Banker Hickok & Boardman in Burlington, Vt., said she has seen almost no change in the borrowing market.

"Vermont has not had a really heavy issue with subprime lending or fraudulent loans," she said. "We're still seeing the majority of buyers do traditional loan programs … I haven't seen it be a problem."

However, Darrell Plummer, of Coldwell Banker Plummer & Associates in Reno, Nev., said some entry-level buyers in his market have had problems getting loans.

"It depends on the buyer and where they are coming from and the job opportunity and salary they are receiving," he said.

Alternatives for the Poor

For those who have less-than-perfect credit, there are still lending options available.

One is Acorn Housing Corp., a nonprofit group that provides free housing counseling to low- and moderate-income home buyers, and matches them with lenders.

Bruce Dorpalen, director of housing counseling at Acorn, said that people often overlook groups like his that can get them prime rates.

"A lot of people who should have gotten prime loans and people who could have gotten more flexible loans through us ended up getting very expensive loans through the subprime market, partly because that's what the mortgage brokers sales force sold, partly because the market doesn't always underwrite well low- and moderate-income home buyers," Dorpalen said.

Acorn does its own loan underwriting and then works with various lenders to get people mortgages. He said the credit scoring industry does not score low- and moderate- income people particularly well, but Acorn looks beyond the scores.

"At the end of the day, a lot of the people who would normally be subprime borrowers that are having a harder time getting a loan could get a loan through us," he said. "To us, it's a whole market distortion."

With more traditional, fixed-rate loans, poor borrowers are less likely to default because the cost of homeownership is significantly lower.

Generally, people come to Acorn because they know about the program, or are referred by a real estate agent, friends who bought a house through the program or local government. The group issued more than 15,000 mortgages last year and expects to exceed that this year.

"It's very frustrating," Dorpalen said, "to see all this happen and know that we could have gotten people a better deal."