So exactly what do you need to get a mortgage these days? Says Patricia McClung, of mortgage giant Freddie Mac, creditors are getting back to the basic three C’s of mortgage lending – credit history, capacity and collateral. Here’s what you need to know about each of those three requirements, and how they’ll affect your ability to qualify for a mortgage in the current mortgage market.

Credit History – Do you pay your bills?

The first C in the mortgage triad is credit history – yours. While having a spotty credit history won’t make it impossible to get a mortgage, it will make it more difficult – and more expensive. Lenders are willing to offer far lower mortgage rates to those with the highest credit scores (760-850) than they’ll extend to those with lower credit scores. The difference can be astronomical. According to June 2008 figures, lenders were offering an average of 5.9% mortgage rates to those in the highest credit bracket. Those in the lowest bracket that Fannie Mae will accept (580-619) were being offered rates of 9.4%. On a $250,000 mortgage, that’s a difference in monthly payment of $588.

In order to be considered for a mortgage by most major lenders, you’ll need a credit score of at least 580, though you may still find some lenders willing to take a risk on someone with a lower credit score, particularly if they really shine in one of the other two C’s. The problem, of course, is figuring out exactly what constitutes a credit score of 580. There are many different barometers, and even the major credit reporting bureaus use different reporting criteria. Essentially, in order to qualify for a mortgage, you should have:

5. no missed or late payments on any credit or utility accounts for at least the preceding 12 months

6. a debt to income ratio of .45 or less

7. the legal ability to enter into a contract

8. no outstanding defaults on credit card or other loans

Capacity – Can you pay your mortgage?

In essence,”capacity” simply means ‘do you earn enough to make the payments on the mortgage you are asking for?’ The typical rule of thumb for deciding capacity is that your mortgage payment should be no more than 28% of your monthly gross income. The debt to income ratio referred to above is another way of determining capacity to pay. Follow these steps to calculate your debt to income ratio:

Add up all your sources of income (before taxes) for the month.
Add up your monthly debt. Include all credit card payments and loan payments, including student loans and car loans. Add in your calculated housing costs, including mortgage, insurance, private mortgage insurance and property taxes.
Divide your debt by your income to get a debt to income ratio.

Over the past several years, the acceptable debt to income ratio has crept up as high as .65, but .45 seems to be the new golden number.

Capacity also can include your savings. Most lenders will require that you have the equivalent of six months housing costs in savings in order to approve your mortgage.

Collateral – What have you got?

The final C in the mortgage algorithm is collateral. In banking terms, collateral is something that you own that will be used to ‘secure’ the loan. When you make a secured loan like a mortgage, you are agreeing that if you fail to make payments as agreed upon, the lender can take possession of the collateral and sell it to recover their loan. With a mortgage, the house that you’re buying serves as collateral. If you don’t make the payments as required, the bank or lender may sell the house in order to get their money back.

The amount of the down payment you make is counted as part of the collateral value. While zero down mortgages were not unusual over the past several years, you can expect most lenders to require a down payment of at least five percent of the purchase price of the home. It’s more common for them to require fifteen to twenty percent down on your home. In general, if you put down less than twenty percent on your home, you will have to carry private mortgage insurance (PMI). PMI guarantees repayment of the mortgage if you should default on the mortgage.

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We have seen many changes in the Reverse Mortgage industry, from increased property values in 2009 to increased program choices and flexibility. The latest and the most important changes are the increases of margins and lenders not going to live interest rate pricing. The conventional side of the mortgage industry has been using live pricing for a few years. Now it has come to the Reverse Mortgage segment of the industry.

For seniors who have been sitting on the fence and not making a decision whether they are going to proceed they need to make a move quickly. The reason it is important to make a decision is simply because with the increase of the margins to record highs means that there will be less money available to the senior homeowner at closing.

Since the changes of 2008-09 which where major changes to make the program more viable and attractive to many seniors, especially with lower interest rates. But with the volatility of the financial markets it is becoming increasingly important to make the purchase of mortgage back securities more attractive to investors. Fannie Mae who has been in the news over and over again and who has seen major changes in the way they purchase mortgages from lenders, now needs to be able to attract new investors of Reverse Mortgages.

With a massive increase in the amount of Reverse Mortgage closing over the last two years it has become increasingly more important for the industry to be able to attract other investors of Reverse securities to make more money available to lenders so they can lend to other seniors. We have seen the following changes in the margins, which are added to the indexes to come up with the effective rate of interest. First let’s look at what the indexes are and how they are determined. There are basically two indexes in the market the first is the CMT or the Constant Maturity index of the treasury. The second and one of the newest is the Libor index which is the London Interbank offered rate. This is the interest rate that is paid to US depositors in London banks.

Once you have the index the lender then have a margin which is basically the profit for the lender and the investor and this is a fixed amount. We have seen the margins go from .75 to 100 to 150, 200, 225, 300 and who knows where it is going to stop. The margins have changed over and over again in the last six months. We have even seen them change in a single week so when a Loan officer is meeting with a senior the amounts they are speaking about are changing at the same time.

If a senior is reading the article they need to make a decision now so they can maximize the amount of money that they can receive because the difference in the margins can have a major effect on how much they can receive. Now this does not mean the sky is falling in because the Reverse Mortgage is still one of the best choices for a senior when you compare it to taking on a conventional mortgage with payments, if they can in fact even get one in this trouble market. With the increasing problems with qualifying for a mortgage a senior may not even be able to get a traditional mortgage. The Reverse Mortgage is today truly the only No Doc loan available in the industry and is only exclusive to seniors over the age of 62.

But the day of sitting on the fence to see what is going to happen to the real estate market is no longer and good decision for many seniors who maybe undecided or just not informed on the value of the program. It still is amazing how many still listen to people and stories that they hear how things that happen that are nothing further from the truth. There are still untrue myths out there that many people are still listening to instead of getting the truth in writing from the real sources, the people and professionals who are the experts of the Reverse Mortgage programs.

Do I believe that the programs is for every person the answer to this is NO the program and no programs can fill the needs of every person all of the time. But it is the only program for seniors that can give them piece of mind of knowing that they will never have to make a mortgage payment, and will never have the fear of loosing their home because they cannot afford to make a payment and it is the only program that is going to give them money with a hole array of choices of how they would like to receive their money. There is not other program in the world that will give the flexibility of the Reverse Mortgage and allow you to take control of your finances for the rest of your life, and at the same time make it so that your children and or heirs not responsible to pay off your debt. So if you are a senior over the age of 62 and you own a home or you would like to own a home and you do not want to have to make payments for the rest of your live take the next step and speak with a professional in the Reverse Mortgage industry and make the best decision of your life since the day you purchased your home.

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