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How are Mortgage Foreclosures Affecting Your Ability to Get a Home Loan?

By Sheryl Landrum
Mortgage Credit Problems Columnist


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With the surge of mortgage foreclosures affecting the lending industry, and our economy as a whole, many lenders have drastically changed the way they are doing business. Find out how the mortgage industry is changing to prevent the danger of bad loans that may result in home foreclosures.

While many lenders have gone out of business due to the increase in mortgage foreclosures, those that are still in business are avoiding foreclosure risk by tightening underwriting guidelines and cutting mortgage programs.

Lenders are avoiding high LTVs and CLTVs (loan to value and combined loan to values) in order to reduce the risk of mortgage foreclosures. Stated income and stated asset programs are also going by the wayside and so are many of the home loan programs with adjustable rates that are believed to be a big factor in recent home foreclosures.

Another way lenders are attempting to prevent home foreclosures is by steering borrowers into traditional and safe loan programs. Interest rate pricing is definitely geared toward the traditional 30 year fixed rate mortgage. Also, rates and terms are generally better on hybrid ARMs (loans that start with a rate fixed for several years before converting to adjustable rate mortgages) than 1 year ARMs. Because two year ARM have contributed so well to the high rate of mortgage foreclosures, finding one may be difficult.

If you need a jumbo loan, be prepared to pay. The FNMA or FRMC (Fannie Mae or Freddie Mac) conforming loan limit is $417,000 or less. Conforming loans are packaged and sold as securities through Fannie and Freddie and there is still a ready market for these loans. Investors (having been burned by more "creative" underwriting outside of FNMA or FRMC guidelines) are more interested in mortgages made under standard underwriting guidelines and today's pricing reflects that. While there used to be a difference of .25-.50% in interest rates between the two types, today a conforming loan may be at 6.375% while a jumbo at the same price is approximately 8.125%....Ouch!

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