Lend me your ear.....and an arm and a leg......

Surely everyone has seen the reports of the stricter guidelines imposed on the sub-prime mortgage market. The sub-prime market was a savior for those borrowers who were credit challenged or couldn't verify their income on paper (???).

The new guidelines call for less "no documentation" loans and for the lenders to go a few steps further in verifying that the borrower can indeed handle the repayment of the loan in the future. Makes sense, doesn't it? I mean, one of the reasons we are experiencing historical foreclosure figures is because many people got into a sub-prime loan a few years back and now it's time to pay the piper. Some borrowers have seen their monthly payments increase by as much as 50%! A few obtained loans without escrow accounts for taxes and insurance, and when those bills come due they can definitely break the household bank.

The "teaser" rates presented to these borrowers were dangerous. I have sat at many a closing table when the mortgage broker couldn't be found because he/she had lied to the borrower and this was only discovered at closing. "What do you MEAN my interest rate is actually two points higher than what the broker said?" And so, buyers at the closing table are forced to decide: complete the sale and close, or risk legal ramifications for walking away from the table. It is a heartbreaking dilemma - especially after I had warned many borrowers about using mortgage brokers or "correspondent lenders". But I won't go into that right now. Suffice it to say I have not had good experiences with mortgage brokers but that I don't believe they are ALL evil.

So, what is a buyer to do in this market when he has less than perfect credit? First, make sure that all the rates, monthly payments and escrow reserves are presented to you WAY before the closing date. This avoids any surprises and still gives you time to shop around for a better deal.

Second, if your new loan includes a pre-payment penalty, SHOP AROUND! This means the lender wants to ensure they recoup their interest before you refinance or sell and if the pre-payment penalty period is longer than 2 years, something is wrong.

Third, realize that if you are being pressured by statements such as "this is the ONLY way you are going to get a mortgage in your situation", you should move on. You may not be a sub-prime borrower to every lender. Don't worry about your credit report taking many hits while shopping for mortgages - this is allowed within a two week period without negative ramifications.

In short, if it feels wrong, it is. If you have a good and trusting relationship with your realtor, as him or her to recommend a lender with a good reputation. Remember, you are the customer and you should feel like everyone is working FOR you, not against you.