Heads up for home buyers

"Over the last three years, rates of home ownership have been declining," says Bonnie O'Dell, director of consumer affairs for Fannie Mae. "A lot of people were creditworthy but for some reason or other, they were being shut out of home ownership. That's changing now."

Just three years ago, Fannie Mae--formally the Federal National Mortgage Association--had very strict rules for the mortgages it would buy.

First-time buyers had to have a clean credit history, a substantial down payment and a fairly low debt ratio--which is the amount of debt-to-income a home buyer would incur with a mortgage. There are still guidelines in place, but "we've become much more flexible," O'Dell says.

Although it's the bank where you apply for a mortgage that decides whether to approve your application, it's really the agencies like Fannie Mae that set the guidelines. That's because local banks don't have enough capital to make hundreds of mortgage loans, so few banks keep these mortgages on their books.

Local banks underwrite--that is, examine and approve--the loans, package them and resell them. The players in the secondary market--government agencies that go by the nicknames Fannie Mae, Ginnie Mae and Freddie Mac--buy up mortgage packages, convert them into securities, and resell them to investors.

Lender flexibility is showing in several key places--including down payment and debt ratio rules--to name two.

Although 10 percent was once the minimum down payment, Fannie Mae has a program to buy loans with 5 percent down payments "or even less," O'Dell says. To find out if there is such a program in your area, call the agency at 800/732-6643. You might also ask about various city and state employer-assisted housing programs.

The old debt ratio guidelines required that you pay no more than 25 to 28 percent of your gross monthly income on a mortgage. Now a lender is much more likely to let you go to 33 percent for the mortgage and 38 percent or higher for your total debt.

And, if you live in an area where housing costs are extremely high, you might get a higher ratio approved by showing that you're already paying the same amount in rent.

But no matter how flexible lenders get, you'll still have to do some financial planning to prepare to buy your first home. You can start by cutting back on discretionary spending and paying down credit card debt.

Get a free copy of your credit report, from TRW, P.O. Box 2350, Chatsworth, CA, 91313-2350. Include a verification of your name and current address, which might be a photocopy of a billing from a major creditor, a utility bill, or your driver's license. Print your name, middle initial, last name, and spouse's first name. Provide addresses for the past five years. Sign the request. You should receive the report in a few weeks.

Clean up any errors on the report by writing to the merchants who made the error and to the credit bureau. According to O'Dell, an excellent credit rating means that you don't have more than two payments that were over 30 days late in one year. "Excellent doesn't mean perfect," she says. "It means a pattern of paying your bills on time."

Even if your record isn't excellent, you needn't give up. Lenders have become much more lenient about credit problems, says O'Dell.

The real questions are: Did you have good credit before you had the problem? What was the reason for the problem? And have you come through it and reestablished yourself?

If you know up front that you'll have trouble getting a mortgage either because you have a credit problem or because you're self-employed and haven't established an income history yet, consider a mortgage broker.

The best brokers act as your advocate, cutting through the red tape and helping you to qualify for a loan. Their services cost you nothing because they're paid by the bank.

But, as in every business, there are some unscrupulous operators, so make certain up front that you'll pay no extra fee to the broker.

Finally, you must think about the best type of mortgage for you. The variety available today can help you buy a more expensive house without increasing your monthly payment:

* Balloon mortgages offer a set rate that is lower than a fixed rate and higher than an adjustable rate for a specified term, usually five or seven years. At the end of that time, you must get a new mortgage at whatever terms are available. Rates are currently about 7.5 percent. This is a good choice if you know you'll spend less than seven years in the house.

* The 15-year fixed-rate loan, which carries a lower rate--about 8.5 percent today--has become popular with trade-up buyers, according to Keith Gumbinger at HSH Associates, a mortgage research firm in Butler, New Jersey.

* Adjustable rate loans have fallen out of favor because they have nowhere to go but up. But, at an average rate of about 6.8 percent today, they can still be attractive to some first-time buyers.

Resources

* The Mortgage Book, by John R. Dorfman, Consumer Reports Books, $15.95.

* Home Buyer's Mortgage Kit, from HSH Associates of Butler, New Jersey, $20. This kit includes "How to Shop for Your Mortgage," a 44-page booklet. This kits also includes a listing of mortgage rates around the country. Call 800-UPDATES or 201/838-3330.