Summary of Mortgage Changes for 2010

This page provides a summary of mortgage industry changes that are relevant to home buyers. We will update this page throughout 2010, in order to keep it current. Last update: 12/28/09

There have been more mortgage-related changes in the last six months than in the previous six years. The housing crisis and economic recession are the main reasons for this. What does this mean for first-time home buyers? It means they will face a different real estate market in 2010 than what we’ve seen before.

Here’s what home buyers should know about mortgages changes in 2010:

Higher Credit Scores Across the Board

In 2010, home buyers will need higher credit scores than they would’ve needed a few years ago. There are two qualification “tiers” when applying for a mortgage loan. You need a certain score just to be approved for the loan, and you need a certain score to qualify for the lowest rates available. (Sometimes you’ll reach the first mark, but not the second.) Both of these cutoff points have gone up over the last year or two.

The exact score required will vary from one lender to the next, so we can only generalize things here. But it’s safe to say you’ll need to be above the 620 range to be approved for a mortgage, and above the 760 – 780 range to qualify for the best rates available.

There are several reasons for this change within the mortgage industry. For one thing, lenders are less willing to take risks on borrowers with bad credit. That’s partly the reason we had a mortgage crisis to begin with. Secondly, Fannie Mae (a company that buys loans from direct lenders) recently increased its minimum-credit-score requirement from 580 – 620. This means that lenders who want to sell their mortgages to Fannie Mae must enforce that same requirement when approving loans.

Note: This, along with the down-payment factor below, will be one of the most common reasons for mortgage rejection in 2010. So before you start applying for loans or talking to lenders, you should find out what your credit score is — and work on fixing it, if necessary. On the main Home Buying Institute website, you’ll find a library of more than 100 articles on credit score improvement.

Stricter Requirements for Down Payments

The days of zero-down mortgages are over. See the “extinction” notices further down the page. In the past, mortgage lenders were willing to finance 100% of the purchase price, giving home buyers who could not afford a down payment a path to homeownership. Those days are over — for 2010 at least. Depending on the type of loan you obtain, you’ll need a down payment of 3.5% to 20%.

This is actually a good thing, though many first-time buyers don’t realize it. The more money you put down on the purchase, the more equity you have from day one. People who make larger down payments are also statistically less likely to default on the mortgage later on.

Changes to FHA Loans in 2010

Mortgage loans insured by the Federal Housing Administration (a.k.a. FHA loans) are very popular with first-time home buyers. You can put less money down with one of these loans, and the qualification process is generally easier than with a conventional loan. But the FHA’s monetary reserves have dwindles over the last couple of years, so there have been some key changes to this loan program. Here’s what home buyers should know about FHA loans in 2010 …

For one thing, you’ll have to make a larger down payment. The previous requirement was 3% of the purchase price. It was recently increased to 3.5%. If certain members of Congress get their way, the down payment requirement could increase to 5% (though the “jury” is still out on that).

Other Changes in the Mortgage Industry

Here are some other mortgage changes that will affect borrowers / buyers in the 2010 economy:

  • There have been quite a few bank failures and mergers over the last few years, especially at the national level. So home buyers will find fewer options when shopping for a loan at that level. In addition to the “big banks,” home buyers should look into local banks and credit unions. In some cases, you can get a lower rate and better service at the local level.
  • Most of the so-called “exotic” mortgages have become extinct. This includes a wide variety of creative financing tools, most of which were designed to put unqualified borrowers into home loans. Zero-down mortgages and interest-only home loans fall into this category. (Editor’s note: These dangerous mortgage strategies should be illegal in the first place, but we will settle for having them disappear.)
  • The Federal Reserve has stated that it will keep interest rates at their current level for the foreseeable future. As a result, mortgage rates could remain low for most of 2010. They are currently hovering in the 5% range and might stay there for the next few months.

We will update this page as other changes occur within the mortgage industry.