It's gotten harder to get a loan, thanks in large part to the subprime mortgage crisis. Part 1 of this two-part series offered advice about how to maintain a strong credit score. Here are some other things you need to do to increase your chances of getting a mortgage, an auto loan or a home equity loan in today's credit climate.
You'll probably need to show mortgage lenders your tax returns for the past two years, as well as three months' worth of statements from bank and investment accounts. If you're self-employed, you may need to provide a year-to-date profit-and-loss statement and a balance sheet showing your assets and liabilities.
Lenders may also look at your employment history, hoping to see at least two years of steady employment. If you've taken time off for school, be ready to explain how that extra education will boost your earning power.
Be prepared to come up with a sizable down payment. No-money-down mortgages have all but disappeared in recent months. As a rule, you should expect to put down at least 20% of the price of your home, and you may need to put up more if the lender considers you a risky borrower.
On the other hand, an excellent credit rating might help you score a loan with a down payment smaller than 20%. In that case, however, you will have to purchase
private mortgage insurance at a price equal to about 0.5% of your total loan. (It's typically financed as part of your mortgage loan, so your monthly payments are higher than they would be otherwise.)
Home Equity Loans
Borrowers looking for a home equity loan may also be caught in the credit crunch. While banks used to lend more than 100% of the value of your home, home equity loans now top out at about 80%.
What's more, you'll need a credit score of at least 700 to
qualify. You'll also have to get your home appraised, which typically costs $300 to $600.
Financial advisers often recommend that homeowners finance a car with a home equity loan, which is cheaper than an auto loan and may be tax deductible. But falling real estate values have made this option less popular.
These loans, too, are a bit tougher to get than they were. That's because even top-notch borrowers are having trouble making their car-loan payments. In fact, the number of top-rated borrowers who are behind more than 60 days on their auto loans increased 20% from 2006 to 2007, according to a review by Standard & Poor's.
As a result, even borrowers with good credit must put down as much as 20%. That compares to 5% or less during ordinary times.
Today's credit crisis occurred largely because people took out loans they couldn't afford -- and banks eager to boost their own profits stretched lending standards to the breaking point. This crisis will pass. For now, it's a reminder that borrowing beyond your means can lead to disaster.
Kelsey Abbott is a freelance writer in Freeport, Maine, where she lives with her husband and their dog.