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Lenders and mortgage insurers pull back

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Because of Fannie's stricter standards, conforming lenders will require credit scores of at least 580. Borrowers won't be able to boost their scores by being listed as "authorized users" of credit cards owned by other people. Anyone who has been 60 days late on a mortgage payment in the last 12 months will be turned down; ditto for anyone who went through foreclosure within the last five years. And the new guidelines cast a wary eye on anyone who is buying a condominium or wants to do a cash-out refinance.

"If it seems like a long list, that's because it is," mortgage lender Dan Green wrote in his blog. "Homebuyers hit by the changes may be subject to higher mortgage rates, higher loan fees or an outright denial on their application."

Insurers even more strict
That's just the lender side of the equation. Mortgage insurers have a say in who gets a loan, and they have become strict in recent weeks and months. They require higher credit scores for loans in declining markets, and the list of declining markets continues to grow.

Take Mortgage Guaranty Insurance Corp. In March, MGIC required a 620 credit score to insure a loan in a restricted market. Now it requires a 680 score. And an already large list of restricted markets grew with the addition of much of Connecticut and Rhode Island, and of the entire states of Michigan and New Jersey.

MGIC won't insure a mortgage on a condo or any vacation home in Florida. Other mortgage insurers, such as Genworth, avoid underwriting policies on second homes in Florida, too, which means that buyers have to come up with down payments of at least 20 percent.

"You need to make sure that you go back to basics," says Michael Zimmerman, head of mortgage banking strategies for MGIC, citing the "3 Cs" of lending: the borrower's credit, collateral and capacity to repay. "Our guideline changes are focused not only on home prices, but also risk characteristics."

FHA's the last resort
Zimmerman adds that borrowers with down payments of less than 20 percent do have another place to go for mortgage insurance: the FHA. It's probably no coincidence that in July, the FHA will begin taking credit scores into account -- something it had never done before. Instead of charging every borrower the same rate, the FHA will charge more to riskier borrowers.

The FHA changes "won't make it necessarily tougher to qualify," says Matt Hackett, underwriting manager for Equity Now. "It'll make it more expensive for the higher-risk loans."'s corrections policy -- Posted: June 5, 2008
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