Good credit? Home loans no longer a sure thing

— -- Jonathan Schecter is set to close next month on the purchase of an apartment in New York City, but it's been an adventure getting there.

He began home-shopping a year ago. Schecter's lender said in September that he could count on 80% financing up to $420,000. The other 20%, or $105,000, would come from Schecter's down payment. But things changed after he committed to buy a place on Manhattan's Lower East Side. The bank said it would finance only $393,000, increasing the down payment he needed by $27,000.

He scrambled to come up with the extra money and managed to hang on to the place.

"It was trying to get the mortgage that was hard," Schecter, 25, a senior manager at a marketing and public relations agency, says of his home-buying experience in the rough-and-tumble Manhattan market.

This is the new, dynamic landscape of mortgage lending today — a world in which even those with good credit are having trouble getting mortgages or the loan terms they want. At a time when politicians and economists are trying to find ways to help Americans buy more homes to reduce the bloated inventories that are causing real estate values in most cities to fall, the mortgage market is undergoing tumultuous changes.

The credit crisis has led lenders to abandon the freewheeling practices that fueled no-money-down mortgages during the past decade and helped fuel the run-up in home prices that peaked in mid-2006.

Compared with the boom years earlier this decade, far fewer buyers are using adjustable-rate mortgages. Lenders generally are requiring much higher down payments, often around 20%. Interest in loans guaranteed by the Federal Housing Administration (FHA) is surging as borrowers accept the government agency's tight restrictions in return for down payments as low as 3%.

"Jumbo" home loans — those for more than the limits set by federally controlled investors Freddie Mac and Fannie Mae — are especially difficult to get, because many private banks no longer are investing in them. Such loan limits range from $417,000 to $750,000, depending on the local market.

Buyers — and properties — are going through extra scrutiny.

In some cases, lenders are requiring a second appraisal to boost their confidence in the value of a property. And on top of everything else, a wave of financial institution consolidations has led to confusion and delays in the mortgage process across the nation.

The changes, particularly requirements for bigger down payments and the difficulty of getting loans higher than the Fannie Mae and Freddie Mac limits, have crimped an already difficult housing market, says Pat Lashinsky, CEO of ZipRealty.

Lenders "really need to change the down payment requirements," Lashinsky says. "It's very problematic. This is a very difficult time."

Suzanne Boas, president of Consumer Credit Counseling Service of Greater Atlanta, sees the uneasiness in her clients.

"In the past six to eight months, credit has tightened," Boas says. "There's a lot of pre-purchase anxiety from first-time home buyers. The irony is that there are a lot of great buys out there."

Lenders acknowledge that it's more difficult to get mortgages, but say loans are still available.

Wachovia Bank, which recently was bought by Wells Fargo, is among the lenders that has stiffened requirements. Even so, spokesman Don Vecchiarello says reports of lending drying up aren't true.

"No lender has stopped lending, especially on … regular 30-year fixed loans" and any that are eligible for purchase by investors Freddie Mac or Fannie Mae, Vecchiarello says. "But there's been a switch in the marketplace, with (lenders requiring) more money down, (and) better credit standards. There are still home loans to be found, and rates are pretty low. It's back to traditional lending standards."

Here's a look at what home shoppers are finding:

More restrictions

Lending companies that have been burned by rising defaults on mortgages are demanding that borrowers offer more proof they can repay.

In some cases, they're also requiring two appraisals on a home to be sure of its value, especially in depressed markets, according to the Mortgage Bankers Association (MBA). For home buyers, that can mean an increase in closing costs of several hundred dollars.

One reason lenders are skittish: There were 1.25 million total foreclosure filings in the USA in 2000. In 2007 there were 2.2 million, according to industry watcher RealtyTrac.

Such defaults are costly to lenders. The MBA notes that each time a foreclosure goes to sale, lenders take a net loss of $30,000 to $60,000.

To avoid such losses, many lenders often want borrowers to have credit scores of at least 680 to 700. Credit scores typically range from 300 (very poor) to 850 (excellent).

The new requirements are much more stringent than those most lenders used during the housing boom earlier this decade, says economist Joel Naroff of Naroff Economic Advisors. That means an increasing number of would-be home buyers must shop around and try several financial institutions to get a loan.

"For the average person, there looks like a really restricted ability to get mortgages," Naroff says. "We're going back to the old days of lending, and qualifications have been ramped up. Lending had become too lax, but now the pendulum may have swung too far" in tightening credit.

Heftier down payments

Banks today typically require down payments of at least 20%. Applicants with relatively low credit scores may be asked to put more down.

However, there are still ways to buy homes if buyers can't come up with 20% of a home's price.

Those with credit scores of 720 or higher can still get 5%-down loans but can expect more scrutiny of their finances, says David Kittle, MBA chairman-elect.

FHA, the Depression-era home loan insurance agency, still offers 3% down, 30-year fixed-rate FHA-insured mortgages for those who qualify. That requires showing a capacity to pay, verified income and credit scores generally of at least 500.

Business for these loans is now booming. In fiscal 2008, which ended Sept. 30, FHA endorsed more than 1.1 million single-family loans, up from 425,000 in 2007.

Ian and Laura Salish, both 21, say they were pleased to get a 3%-down payment loan through FHA. They closed this month on a three-story, three-bedroom townhome in Seattle for $319,000.

They had to show proof of employment — Ian is a sales representative for an organic food company, and Laura is a personal assistant — and explain gaps in their job histories. But they're relieved to be getting a 30-year, fixed-rate mortgage at 6%.

"No way I'm doing an ARM. I'm too scared," Laura says, adding that she loves the house with its granite kitchen countertop and stainless steel appliances.

But for some first-time home buyers, coming up with heftier down payments and covering closing costs can seem insurmountable.

Leonard Poteat, 27, a graphic artist in Washington, D.C., is trying to buy his first home and has been looking since June. He's found plenty of affordable homes but also has found that he's competing against investors who are looking to snap up properties and sell them when the housing market rebounds.

He's also finding it difficult to come up with both a down payment and closing costs.

"That's a significant amount to come up with. The typical person doesn't have $15,000 to $20,000," Poteat says.

"I have the down payment, but it's the closing costs I'm still trying to hammer out."

Fewer loan options

In the housing run-up this decade, lenders offered a smorgasbord of loan products. No more.

In September, for example, Wachovia quit offering an adjustable-rate mortgage that allowed borrowers to select a payment each month, including an option that fell short of the interest that accrued over the period. Such loans were widely available during the housing boom.

Even less-exotic ARMs are down sharply in this market.

MBA says ARMs' share of mortgages was 36.6% at the peak in March of 2005. For the week ended Oct. 22, ARMs were down to 2.6%, meaning 97% of mortgage applications are now for fixed-rate loans.

More confusion

Some buyers are finding that the bank or mortgage company from which they'd expected to borrow has been acquired by other institutions amid the upheaval in the financial system.

It was almost disastrous for Chris Savarese, a northern New Jersey resident. After weeks of searching, he found the perfect apartment to buy, his loan was approved, and he was set to close. Then came a surprise: His lender, Washington Mutual, was faltering. Its banking assets have since been purchased by JPMorgan Chase.

Suddenly, Savarese learned his loan request had been rejected.

Savarese's lease on his rental apartment was up, so he had to move back in with his parents, put his belongings in storage and find another lender. He did so and bought an apartment this month. "It was a complete unraveling and the most stressful experience of my life," says Savarese, 28, who works in New York in the communications industry. "I'm a professional. I shouldn't be sleeping on a couch at Mom and Dad's. It's a crazy time."

But Kittle, the incoming MBA chairman, emphasizes the positive, including fixed rates on 30-year mortgages that are hovering just above 6%.

"Rates are still near historic lows," he says. "We've returned to (stricter) lending standards, and that's not necessarily a bad thing."