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Letter to the editor

Credit crunch constricts home, car loan availability

By HELEN HUNTLEY, Personal Finance Editor
Published August 27, 2007

Why are so many mortgage brokers and lenders in trouble, laying people off, borrowing money or going bankrupt?

Business began going south with the housing bust. Fewer homes sold meant fewer mortgages, and when houses didn't increase in value, fewer people could do a cash-out refinancing. On top of that, we now have a credit crunch in the mortgage market.

How did that happen?

Mortgage brokers and many lenders make money from transactions, not from interest payments. After making a loan, lenders sell it to investors, which then gives them money to lend to the next borrower. Lenders have stopped making or sharply curtailed certain types of loans because they can't find investors willing to buy them.

Why have investors gotten so skittish?

Delinquencies and foreclosures have been higher than expected, and there's a lot of fear about how high they'll go. This uncertainty makes investors reluctant to own some types of mortgages and mortgage-backed securities.

So will I be able to get a mortgage if I want to buy a house?

Yes, if you have good credit and you want a standard loan with full documentation of your income. Otherwise, maybe not. Even if you have great credit, you may not be able to borrow more than $417,000 because that's the biggest loan the government-chartered corporations Fannie Mae and Freddie Mac will buy for their portfolios.

Are other types of loans affected?

Although interest rates generally have stayed about the same, there is evidence that lenders are getting pickier about who qualifies for credit cards, car loans and home equity loans.

If I want to apply for a mortgage or car loan soon, what should I do?

Get your credit in order. Start by checking your credit report you can get a free copy once a year through www.annualcreditreport.com, clearing up any unpaid debts and contesting any inaccuracies. Pay down your credit card balances as low as you can get them. Owing less than 10 percent of your credit limits is ideal. Do not apply for any credit cards or take out any new loans before applying for the big loan you really want. And, of course, pay your bills on time.

How good does my credit have to be to get a mortgage?

That varies with the lender. A FICO credit score below 620 is considered subprime, but some lenders set the bar higher at 650 or 680. Some lenders will reject your application if your score is too low. Others will give you a mortgage but at a higher interest rate. Borrowers with scores of 720 or better get the best rates.

How do I know what my credit score is?

You can order it for a fee when you get a credit report. For more information about credit scores, go to www.myfico.com.

I read that interest rates might be headed down. Should I get an adjustable rate mortgage or go fixed?

Go adjustable only if you are certain you'll be moving before the rate adjusts. Don't count on rising house prices to make it easy to refinance when that happens.

What if I already have an adjustable rate mortgage and I know the payments are going to be more than I can afford when the rate resets?

If you want to stay in the house, switch to a fixed-rate loan if you can qualify for one. If that's not possible, talk over your situation with a HUD-approved housing counselor (call toll-free 1-800-569-4287 for a referral). And contact your lender as soon as you run into trouble.

Your loan story

How have you been affected by problems in the mortgage market? Have you found it more difficult to get a mortgage? Are you caught in an adjustable rate loan with rising rates? Been unable to sell a house because your would-be buyer can't get a mortgage? Please post your response to the MoneyTalk blog at blogs.tampabay.com/money or send it to Helen Huntley by e-mail at hhuntley@sptimes.com.

[Last modified August 26, 2007, 23:03:39]