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Dear Lazyweb....
blaisepascal
It used to be that getting personal credit was hard -- the joke that the only way to get a bank to loan you money was to prove to them you don't need it had a bite of truth to it. The banks and credit companies found they could make money by loaning to more marginal people. Then they found ways to pass the risk onto others, and the credit floodgates opened. Getting credit was easy, be it in the form of credit cards, HELOCs, mortgages, etc.

The subprime mortgage crisis, and all the dirt it is uncovering, has had the result of having everyone tighten their standards.

Does anyone know how, historically, the current standards fare? Would it be easier or harder for a family earning $40K to get a mortgage for a $100K house in mid 2008 than in mid 1998 (assuming the incomes and house prices were inflation-adjusted)?

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It means I'm too lazy to do the research myself, so I'm asking the "web" to do it for me.

*lol* I'm a user of that particular style of web surfing as well but I find I almost never need to ask :)

It's a more complicated function that that. In a one word answer

YES

2000 was the start of computerized underwriting where you had an increased weighting of credit scores and a decreased emphasis on traditional underwriting. The combined with the start of CDO's so that the risk wa moved off the issuer and onto the bond holders, you had really truly sloppy lending that peaked about 2 years ago.

Fall 2003, 36K income approved for 150-200K loan. Need I say more?

The big keys to lenders as per one of the RE lists I am on is going to be your DP/equity post refi because people who have 20%+ do not walk away and it gives the lender an equity cushion should they foreclose, and your ratios, and your payment history.

Basically we are going back to the 80's before FICO.


*sobs*

Minimum credit scores now are 575 and higher, and that's for VA loans no higher then $75K. Wolf and I will probably make around $40K this year, maybe a little higher, but there's no way in hell we're gonna be able to afford a $100k house.

Right.

The question I have is: Are you being penalized by the end of overly-loose credit, or are you simply not benefiting from the insanity? Has there been an over-correction in the credit market, or just a return to sanity?

I'll be honest, my thought about your house plans were basically: Just moved into the area from CO, two kids, no current history of stable employment... and you are buying a house? The bank says yes? How is that possible?

I thin the factor is from reading back this persons posts on her LJ ( this is someone I know from B&A's? Your teacher's friend..) I have to goto bed for work in about 10 minutes and I have a big paper due on wed so IM me if it's a emergency.

I think the overall issue is developing a plan after doing some research on "preparing to buy a house" which overall is in their best interest. An educated consumer with mentors and support that is not getting a commission or a vig is in a much better place.

It used to be buying a house was part of "the plan" and part of the return to reality/sanity was that the people that watched who got loans were getting a cut and were able to pass off the risk to the bond market.

Example: DeadbeatPete comes to me and says he want to borrow 1000 dollars, and I go Joe whats your job like and how much do you make, who else have you paid back, who else do you own money to? Because I want my money back.

Now what happened was I could take Pete's loan even if he was a poor risk and put Darren, Sam's, ect with his and sell it as a bond at a couple points below the interest rate. I make less money, and I get 3 dollars for giving Pete a Loan. So mo matter what I want to make as many loans as I can because I have no risk.

That's CDO's in a nutshell. As long as only Pete defaults, and there are enough people paying everyone makes money. So the people who used to check if you could pay stopped caring because they were told not to because the more loans you made the more you got paid.

And then a large percentage of people could not make the payments and the system crashed. Which is what is happening this year.


Well the big issue is the DP. A 100k house for 40K income is like 2.5X income. I live in NJ where the average loan is 6-10X income. That 2.5x is a great and affordable ratio. Totally within reach with a little planning. [this is an unlocked post so I really want to not post too many of my specifics like my game plan]

First disclaimer, I'm 28, I have made some STUPID money moves. I still have a lot to learn, and secondly this is information gleaned off of my own spotty research. And people on the internet are like horse racers at OTB they really like to talk about their winners. And some of those people are really elitist.

I think though if you have a credit score of less than 600 you might want to wait and rebuild your credit first. The reason is overall that will affect your rate. Which will matter for as long as you have the loan. Yes you could refi but then you have to pay all the refi fees ect.

Secondly the DP is a big thing but also the first couple months you will be spending money at a much higher rate when you first move in. Statistically new homeowners spend 5x as much on home goods in the first year as an established couple does in 5 years. So much so that companies send people to go through the deed office of counties and compile mailing lists of recent buyers. [need a reference here]
So having extra cash is a good thing.

When you look also at homeownership the buy/rent ratio which as been broken in the last 5 years all over the region needs to be taken into account as well. If I pay 1000 a month to rent all inclusive, and 2000 a month to own and then I have to pay a grand a year on upkeep and an ew roof every couple years ect ect ect.

Over the long run owning is better and I own. But the rents in my area are 1200 for the same style size apartment and I pay 650 a month. I come out way ahead. If owning was 1200 and renting was 650 a month I would rent. Because I am buying for about 7-10 years and then moving (year 5 currently)

But upstate ( I think I have the right person in my head that I am talking to ) was a little overpriced for what it is/was. I'd wait a few years, because elapsed time and making all your payments on time are the keys to raising up your credit score[see the motley fools getting a 850 article], a lower overall rate will reduce the payments. Clean up any debts you have [cc,sl,car,livestock] so your ratios are in good shape which will help you qualify for the price house you want.

And finally do some research on saving up for a down payment. I ate a lot of pathmark pasta, and really cut back on my lifestyle, and I just did it again to pay off the student loan interest.

And talk to D.S., I am just getting started, he is almost done. One of his pieces of advice is saving me a lot of money with grad school.

I'm the really short chick with the new baby girl, married to B's long time friend Kevin, who's about 5'10" with thick curly hair and a chest like a linebacker. Does that help? ^_^

When we started this fiasco last year, we weren't EXPECTING to qualify, but we did. We were already sick of renting, both of us had good jobs at that point, so we went forward with a very small DP because that was an option available to us. Then the sellers dropped the ball and we got caught in the aftermath of the collapse.

Now, we have a much bigger DP available, I've gotten two raises, and our work history is still stable and strong. It's just the credit score that the banks are looking at now and they won't make exceptions for good payment histories, which we have. We've been living with family since we moved here, so there's that to take into account as well.

If we have to, we'll do the 'rent for a year' and try again in 2009. We just don't WANT to and there are faster ways to get a credit score boosted 30-40 points when everything else is in order.

I'm sorry I forgot to conclude something here because I had a paper due on Thursday. I'm doing a lot of money research on my LJ because I am in a three way bind right now and planning the best way to get out of it.

Well I think the best choice of action is to assess where you are with your credit, your ratios, and the cost of housing you are looking at and do a little fact finding mission with some lenders.

Unlike my parents where they had to get dressed up and goto the bank ( yes I remember this even though I was like 6 at the time ) to deal with the loan officer, now it's all done online and on the phone.

I had to go though a bank because I have a co-op. (It's a NYC RE market thing) But my bank had me call the mortgage center and they asked some questions and gave me my FICO scores. And then they told me what they can do for me which would be that dangerously large amount listed above.

Calling your bank is a good place to start for a baseline. And then you know. You may get a better offer from a broker, you may get turned away and then have to use a broker, but I feel that your bank is like applying to State U. Once your in somewhere you can go about picking the best offers.

Everything else is just WAG's.




We're working with a buyer's agent who's doing most of the legwork on finding a lender for us. ^_^

As for our revolving credit, we'll have that knocked down below 50% in the next week or two. Depends on when the payments clear. That plus challenging those collections should make us look better on paper.

We'll see what happens. Life took a big left turn when my son took a 10 foot tumble. He's ok and back home, so I'm counting my blessings.

Has there been, in your opinion, an over-correction in the mortgage market or just a return to sanity?

See above about CDO's and how nobody was accontable. This is Economic PHD's Dissertation material. It's too big and I don't fully understand it.

Historically, there are 3 primary drivers in investment: real estate, investment in materials (gold/precious stones/currency/foodstuffs), and stocks and bonds.

In a recession, interest rates trend lower and so do stocks and bonds, so, credit to buy a house, in theory, is less expensive to obtain. The flip side, usually, is that there is less money for some workers to purchase homes. Thus, in a recession, if you have a solid income, it is a good time to buy a house, as interest rates are low and long term, you come out ahead. Conversely, as an economy goes into a growth environment, stocks and bonds and materials climb in value, and interest rates rise (as they did in 2003-2007), which makes buying homes more expensive.

So, what is going on here is simply a natural correction, despite what the popular (and generally not knowledgeable) press indicates.

Specifically to the subprime issue, this is nothing new. In 2001, it was the dot com die-off. In the late 80s, Junk Bonds were the same thing. They are all the same thing: A speculative market (one not supported by real market-based profits) always, at some point, fails. A subprime loan is an intentional choice by a lender to accept a loan from a less than normally worthy customer. They have existed for years - many HUD loans are such. The reason why Subprime loans are getting the attention now is because so many people are affected who seem to be wealthy. It's the same with the other "bubble markets" I mentioned above - the dot com millionaires who went bust or the Junk Bond Kings in Chapter 7. So, the press latches on to this particular "big story" as a reachable symbol of the recession that is or is about to be.

Note: The National Bureau of Economic Research (they are in charge of this sort of declaration) has not declared a recession yet. I feel that we are headed that way.

To return to the original question: Banks have not lessened their lending standards. If anything, they're better. However, many subprime companies, or mainstream banks who created subprime subsidiaries, intentionally relaxed their standards to get into a "hot" real estate market. Inevitably, these companies did not secure "good clients", i.e. those people whose credit was originally poor but who were moving to a better position. Instead, they offered credit to people who were incapable of improving their incomes - especially with the riskier Adjustable Rate Mortgage. This is poor underwriting, and now they are on the hook, and people are losing their homes.

The subprime crisis, at least economically, is no different than the dot come meltdown. We're having a normal correction to a bubble market, in concert with a natural recession. It's unfortunate that "good people" will get hurt, but that's the same with every recession or bubble market bursting. People made poor choices. Hopefully, those who did learn from the experience. This just goes to show: Buy and live within your means.

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