New York City Tourism in a Blink

By: Austin Lansing
There is no question that guidelines for credit approvals have tightened compared to this time last year. The same person, who applied for a mortgage one year ago, may not be approved today. Unfortunately, this is the result of abusive lending practices where borrowers were tempted with introductory low rates of interest; once the promotional period was over, the rates rose to an unaffordable high, causing many people to lose their homes. In August 2007, the amount of foreclosures increased by 115 percent from August 2006 - one in 510 households was affected.

Buyers should not be scared off by the prospect of financing a new home, the past errors has created a climate of caution, with stricter policies that ensure the borrower can afford the rate for the life of the loan. These are sensible lending practices that ensure people are buying what they can afford.

The Average Borrower

The average prime borrower may have some stricter rules, but there should be no difficulty getting credit. They may be required to produce more income and asset verification than in the past, and will be required to demonstrate timely bill paying and an acceptable debt-to-income ratio.

The High Risk Borrower

Anyone with credit problems may run into some road blocks when trying to get a new mortgage. There are nonprofit groups which offer free counseling to buyers that have difficulty qualifying for home loans as well as match them up with potential lenders.

Second Home Buyers

Surprisingly, this more affluent group of borrowers can also run into some problems; they are considered more of a high risk because of high expenditures and limited cash flow. They may find themselves paying higher interest rates and higher mortgage insurance rates. Where a first home mortgage may only have to produce a down payment of 5 percent, it's not unusual to request 10 to 20 percent down for a vacation home loan. This is not a reflection of the current climate in lending, these requirements have been in place for years.

Often home owners will purchase a vacation home by acquiring a home equity loan based on their present home. This does come with higher interest rates as well as the risk of losing your principle residence if you run into financial problems. Keep in mind however; New York CPA Paul Kamke advises there is an IRS rule that states "you have just 90 days from purchase to secure a mortgage against a principal or vacation residence. Do it later and you can't deduct it at all".

If you intend on renting out your second home, be prepared to provide a business plan outlining how you plan to generate cash flow. If it is currently being rented, most lenders will only take 75 to 80 percent of the rental history in consideration.

Basic lending Criteria:

Whether you have good credit, bad credit or looking to add to your current real estate portfolio, a mortgage lender always looks for the following basic criteria:

Collateral: The property or goods used as security against your loan, sometimes known as Loan to Value or LTV.

Credit History: This involves your track record for paying bills on time and making the minimum payment required.

Capacity: Will you be able to pay off this loan and still feed the family?

Commitment: How much of a down payment are you making; the bigger the better.