by Jeanette Joy Fisher

Federal monetary regulators will soon be tightening regulations on various types of what they call risky loans. Other terms used to describe such loans are nontraditional, alternative, or exotic, and include such vehicles as interest only, payment option, piggyback, and other types of adjustable rate mortgages (ARMs), as well as some home equity loans.

There's no question that each of those practices can be helpful in specific cases, allowing buyers to purchase a home or to buy a larger, more expensive home than they could under the more loan guidelines and programs available with a more traditional fixed rate loan (FRM). However, feds appear to have been alarmed by the increasing popularity of nontraditional mortgages such as those listed above, especially among borrowers who may be less creditworthy borrowers.

Stricter Qualifying Requirements

Interestingly, the tighter requirements will begin requiring lenders to rely less upon credit scores, which have been the industry backbone as far as determining the creditworthiness of buyers for decades. Instead, lenders will be required to take such factors as documented income, repayment capacity, and other evidence into account. The basis for the shift is that previously reliable creditworthiness models haven't really been tested adequately against a backdrop of falling home sales and prices and rising mortgage rates.

All that translates to a simple fact for investors: if you're hoping to use one of the more exotic types of home loans, you need to hurry before that program disappears. If you don't, your choices are going to become much more limited in the relatively near future, and your creditworthiness will be more closely scrutinized than ever before.

If you can't move quickly, here's how to prepare yourself for the changes that will soon be coming.

First, educate yourself on what types of loans will be available. It's always paid to shop around, but that will become even more critical in the future. With some of the nontraditional funding sources drying up, it will be more important than ever to know what types of loans ARE available.

Obtain a copy of your credit report, and if you find mistakes, take steps to correct them before you seek financing for a new property. You can pull a credit report free every year, and it's well worth doing. It can save lots of heartache and frustration later on.

Find out how much you can qualify for, which programs will be available to you, and what you need to do to qualify. That way, you won't have to rely on any of those exotic funding measures that are about to disappear anyway.

There's no doubt that some investors wouldn't be in their rentals today without some of the nontraditional programs that have been available. With rising payments, rents may not cover the higher mortgage amount. However, in some areas, pressure on the rental market has helped landlords with increased rents.

All these changes, mortgage programs, prices stabilizing, and more homes on the market mean that investors who know what they can do and understand their market economy will be set to make a profit. Because people always need housing.

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Copyright © 2006 Jeanette J. Fisher
Lake Elsinore Real Estate