With the tightening credit markets of late, borrowers might find themselves more challenged when attempting to purchase or refinance(refi) a home. Two areas where borrowers may feel the impact of this are in their credit profile and their down payment when purchasing a home loan.

Credit Issues

Most lenders of conventional financing, following the lead of Fannie Mae and Freddie Mac (the organizations that will ultimately purchase their loans) over the last year, have been tightening their credit guidelines.

Currently, the lowest credit score for borrowers on loans that either Fannie or Freddie will purchase from a lender is 620. Additionally, loans that have scores from 620 up through 740, depending on the level of equity, will incur some type of premium charged to the lenders, which pass them on to the borrowers. Credit report items such as bankruptcies are also being scored more heavily, often disqualifying borrowers from being able to purchase a home.

Being able to manage credit is now more important than ever as credit scores will affect a borrower’s mortgage rate, and ultimately the monthly mortgage payment.

Down Payment

Until recently, 100% financing was readily available. Some of it, before the market bubble burst, was obtained with very low credit scores. These days, however, lenders are more conservative, and want to see that borrowers have some financial interest in a property.

Even with the use of second mortgages and home equity products to help borrowers put less money down on a house, many first lien lenders are only allowing borrowers to reach a combined mortgage debt of around 90% of the value of the property.

Lenders that had traditionally written second mortgage loans have either pulled out of the market or tightened their guidelines, enabling only the most qualified borrowers to obtain a loan.