Get a Better Florida Mortgage. Here’s How.

Just as Florida housing prices stall, lenders are making it tougher to borrow.

A recent report from the Federal Reserve shows that 15 percent of U.S. banks began tightening credit standards at the end of 2006 - the most since the early 1990s.

Since then, the belt-tightening has only accelerated as lenders worry about a slowdown in home price growth and borrowers’ ability to repay their Florida mortgage loans.

In December, for example, EMC Mortgage Corp., a subsidiary of Bear Stearns Companies, as much as doubled the amount of cash savings that loan applicants need to qualify for a loan.

Then in February, the bank announced it would no longer offer so-called piggyback loans, which let consumers finance 100 percent of a home’s price. Now, you must put down a minimum of 5 percent or 10 percent, depending on other factors in your loan application.

“After analyzing the current market conditions, we decided we needed to get to a lower loan to value ratio,” says Mary Haggerty, co-head of Bear Stearns’ mortgage finance department.

Residential Capital (ResCap), the real estate finance arm of GMAC, tightened standards last month - had the new rules been in effect last year, around 58 percent of subprime loans would not have been approved.

While those changes can be alarming, not everyone is at risk. The tightening has occurred primarily in what’s known as the subprime and Alt-A Florida mortgage markets.

Subprime loans are made to borrowers with a poor credit history. Alt-A is not a well-defined category but typically includes borrowers with higher credit quality who don’t want to document their income on a loan application.

But prime borrowers can still get competitive terms.

“There’s so much overcapacity in the industry right now that banks are eager to make loans to borrowers with strong credit,” says Mark Lefanowicz, president of E-Loan, an online direct lender.

Ideally, therefore, you want to be considered a prime rate borrower in today’s lending environment. There are clear steps you can take to become one. The key is to start working on your financial profile as soon as possible.

To get started, follow these tips:

• Pay Down Balances: Most lenders look at your FICO score when reviewing your Florida mortgage loan application. FICO stands for Fair Isaac Corp., which calculates the rating, and the score ranges from 300 to 850.

According to Fair Isaac, the median FICO score is 723. Borrowers with a score of 700 or more generally are considered prime.

Approximately 30 percent of your FICO rating is made up of how big your balances are compared to the credit available to you - what’s called a credit utilization ratio - one of the fastest ways to improve your credit score is to pay down your debts, says Craig Watts, public affairs manager for Fair Isaac.

There’s no magic percentage. However, credit experts recommend you stay below 50 percent. And the lower you go, the better your score will be.

• Pay on time: Your payment history, or how often you pay your bills on time (or late), is equally important, making up another 30 percent of your FICO score.

A late payment stays on your credit report for as long as seven years. Its impact on your score, however, gradually fades over time - as long as you get current on your bills.

Your score will gradually move up after as few as six months of on-time payments, according to Evan Hendricks, author of “Credit Scores and Credit Reports.” And you’ll see a more significant leap after one year.

• Resist new credit: New credit card and store-card offers can be tempting, especially if you get 20 percent off your purchase at the check-out counter.

But if you’re about to Florida mortgage refinance or take out a mortgage, don’t open any new lines of credit. The number of times you apply for new credit, called inquiries, accounts for 10 percent of your FICO score. And the fewer you have of them, the better.

Otherwise, “It could look like you’re going on a credit spree,” says Hendricks.

SOURCE: Money Magazine