Can I Still Get a Home Loan in 2008?

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OK, so we all know the real estate market is down and loan rates appear to be headed higher. So that means it’s a bad time to buy real estate, right? Wrong!

I will tell you that I bought my first home in the last major US real estate downturn and it proved to be the absolute best investment I’ve ever made. Read how my initial investment of $16,000 made me over $1 million in 10 years!

Contrarian investors know that buying low and selling high is always the best path to higher returns and whether this market is at the bottom or not, you should really consider buying soon.

While you might get an even better price by waiting another 12 or even 24 months (since real estate tends to move in a slow 7 to 10 year cycle), you may find yourself too late and miss out on the lowest prices we are likely to ever see again! Also, with money supply tightening, it’s typically harder to qualify for home financing right at the bottom of the market, so now may be the best time ever to buy real estate!

Lenders are hurting for business right now, but the Federal Reserve acted multiple times over the last 24 months to ensure loan rates remain low (around the 6 percent range) while inflation has been in check. But, with the specter of higher inflation, the Fed has recently warned they may need to raise interest rates; hopefully we won’t see anything like the early 1980s when interest rates on home loans rose to over 10 percent, causing some pundits to speculate we’d never again see 5 percent home loans.

As usual, the doubting Thomas types will try and tell you the world is coming to an end, when we should all remember that all markets are cyclical! The pendulum swings one way and then comes back the other way sooner or later; patient investors know this and typically apply contrarian investment approaches to make higher than average returns over the long haul.

While it is a bit harder to qualify in today’s home financing environment, you can still get a historically low interest rate today if you line up your ducks. Read on to learn how you can get into a great real estate investment, even if you still don’t have a lot of cash saved up to put down!

Prime and Subprime Borrowers

For those who don’t know the real estate lending business that well, borrowers are typically classified as either “prime” or “subprime”, referring to how good your credit, income and loan-to-value (LTV) ratio look from the lender’s point of view.

Back in the 2003 to 2006 timeframe, lenders were extending loans to many people who were on the edge between qualifying and not qualifying for a home loan. The lenders were reaching for ever higher revenue and profits on their income statements and with housing prices skyrocketing, it became ever more necessary for them to make subprime loans to marginal borrowers.

As many of these home buyers had to go with variable rate loans, the triple whammy of higher monthly payment, job losses due to a slower economy and sinking home prices in some housing markets has turned some unlucky borrowers upside down, making it difficult for them to continue making their payments. That has led to a higher than normal foreclosure rate nationwide over the last 2 years as well as increased scrutiny of borrowers’ income, credit rating, etc.

OK, But Can I Still Get a Home Loan in 2008?

The answer is yes and no, depending on your own specific situation. One thing is for sure; you’ll need to provide more documentation of your income, appraised value of the property you’re buying or refinancing, etc. If you fit into that “subprime” category as a borrower, you may find it tough to obtain financing in this market.

So, you ask, how do lenders decide if I fit into the prime or subprime bucket? Great question! Here’s the low down …

Characteristics of Prime Borrowers:

  • FICO credit score over 620, indicating prompt payment of loan obligations, etc.
  • Little or no other outstanding debt; especially unsecured debt such as large credit card balances, auto loans, etc.
  • Stable income and employment record that is easily verifiable
  • Property being financed appraises at or higher than 80/20 LTV

Characteristics of Subprime Borrowers:

  • FICO credit score under 600, indicating late payments on previous loan commitments, etc.
  • Have too much outstanding debt already
  • May be self-employed or do not have a record of stable employment and steady income
  • Property being financed appraises lower than 80/20 LTV

But If I’m a Subprime Borrower Can I Still Qualify?

Now, obviously you may have 1 or more of these characteristics that fit into either category; that is fairly typical of many borrowers and is what loan underwriting is all about; lenders must evaluate all the variables and weigh the risk that you will potentially be unable to meet your debt service obligation!

Also, just because you may be considered a subprime loan candidate doesn’t mean you can’t get financing; it often means you will ultimately pay more, but with the great potential for real estate prices to recover over the next several years, it may still be a great investment to make!

If you have a FICO score below 600, you may still get a loan, but it’s likely to be an expensive subprime product. It is also more difficult for subprime borrowers to manage “creative financing” in the current market; you will be less likely to qualify for a 90/10/10 or similar low down payment loan.

The Power of Real Estate Leverage

Now, if you’re lucky enough to be considered a prime borrower, you can take advantage of this opportunity in many ways! For example; if you have equity in your primary residence, why not borrow against it and use your leverage to purchase a vacation home or, even better, a rental property?

Many people will say this is too aggressive and, like an estimated 40 percent of Americans, prefer to pay their home off and have no outstanding balance; which is a perfectly fine, if conservative approach. But you will hear me say over and over again on this blog that you are missing out on one of the best available investment chances if you take this route. No other investment allows you to own an appreciating, income-generating asset while investing so little of your own money up front!

If you would like to accelerate your plans to retire and wish to achieve financial freedom, then using the extraordinary advantage afforded by leveraging your real estate to buy additional properties is one of the best means of reaching your goals!

So, whether you are a first time home buyer or an established real estate owner, don’t accept what you hear from the so-called pundits these days that home prices and the home loan industry is all doom and gloom. Investigate your borrowing options and you may be quite surprised to find that 2008 is a great time to buy and finance real estate so that in a few years from now you aren’t kicking yourself and saying “If only I’d been able to buy a home during the downturn. Now the prices are too high and I can’t afford to buy real estate!”

August 13th, 2008 by Local Fresh

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