Low rates could make home-dream come true

HOME ownership is part of the American dream -- considered important enough to scrimp and save for. There's the pride of ownership, the sentimental attachment, and the financial security that come from real estate appreciation. For those who want to share in the dream, this should be a time of celebration.

Interest rates are as low as they've been in more than half a decade, with 30-year fixed rates below 12 percent in some places and one-year adjustables as low as 81/2 percent.

Even though rates have moved up a bit since their lowest point a few weeks ago, they are still bringing people back into the housing market. Hopeful home buyers are going to open houses, talking to real estate agents, and dickering with lenders.

Lately, however, that is often as far as it goes. Too many buyers defaulting on their mortgages have made it bit tougher for everyone to qualify for a mortgage.

While interest rates are relatively low, so is the rate of appreciation. As a result, people who were betting their house would shoot up in value so they could sell it quickly and move into another with a larger down payment have found the appreciation isn't there anymore. Then, if they run into a financial pinch, they may walk away from the house and the debt.

As a result, past-due and foreclosed mortgages have climbed to new heights. The number of mortgages past due, for instance, reached a record 6.19 percent in the first quarter of this year, compared with 5.47 percent for the same period last year, according to the Mortgage Bankers Association. Foreclosures went from 0.19 percent to 0.24 percent.

Lenders have responded by getting tougher about deciding who qualifies for a mortgage, and prospective home buyers have had to rediscover an old-fashioned method for getting into a house: Save up for a bigger down payment or aim for a smaller first, or ``starter,'' house.

``It's harder to get by with low down payments now,'' says James Christian, chief economist at the US League of Savings Institutions. ``It's tighter today than it has been over the last five or 10 years. The lenders have tightened up on underwriting standards.''

Those that haven't tightened up got a big push in that direction earlier this month. The Federal National Mortgage Association, or Fannie Mae, announced Aug. 5 that it is tightening its requirements for home mortgages that it will purchase from lenders. Since Fannie Mae is the largest participant in this secondary market, the move is expected to set the standards for the industry.

Under the new standards, if people put only 5 percent down, then mortgage payments on a 30-year fixed-rate loan cannot exceed 25 percent of their gross income, down from 28 percent in the past. At the same time, housing expenses plus installment debt cannot exceed 33 percent, vs. 36 percent under the old rules. Those 28- to 36-percent rules also left room for exceptions in certain certain cases. With the lower 25- to 33-percent limits, some exceptions will be allowed, but they have to be fully justifie d to Fannie Mae.

For a $76,500 home with 5 percent down, a borrower would have to earn $41,232 to qualify for a 12.2 percent fixed-rate mortgage, compared with $36,814 under the old standard.

Although not binding on lending institutions, the new guidelines mean lenders will have a hard time selling into the secondary money market any mortgages that do not meet Fannie Mae standards.

Although some may be pushed out of the housing market by these guidelines, Mr. Christian says, perhaps those who can afford to put down only 5 percent should keep saving. The changes, after all, don't apply to mortgages where the down payment is 10 percent or more.

With these new standards in place, reaching the goal of a home purchase is going to require more effort and time.

``You may have to wait six months or a year more before buying a home, if you don't have the income to support the payments,'' says John Sousa, president of the Commonwealth Mortgage Company in Boston. Fannie Mae's new rules, he adds, have been anticipated by the lending community for some time, and most lenders were already following fairly similar rules of their own.

Also, Mr. Sousa says, he and many other lenders follow some less scientific rules when it comes time to qualify someone for a loan.

``Some people buy a home who go with 28 to 36 [percent income standards] and will eat spaghetti for the next five years,'' he says with some exaggeration. ``But others will go 28 to 36 and have to eat filet mignon every night. If you underwrite to the individual, you do much better.''

Those who really want the house and seem more willing to make some sacrifices to keep it can be held to easier standards than those who would feel uncomfortable making some sacrifices.

The new Fannie Mae rules may also put a crimp in another option that often helps young people get into their first home: loans from parents. If an adjustable-rate mortgage is involved, Fannie Mae will not permit part of the down payment to be in the form of a loan from the parents. Should payments rise and the homeowners find themselves in a bind, Fannie Mae officials figure, they may repay their parents first.

``Some people don't want their parents to know they're having a tough time, so they'll pay them first,'' Mr. Sousa says.

If you're going after a fixed-rate mortgage, a gift or loan from parents or other relatives is still a feasible option.

You may also find it easier to qualify under the new standards if you can reduce your other debt. If you can cut expenses for a few months and pay off a car loan, for example, you might come in under the 33 percent limit on total installment debt.

If one lender is sticking to the lowest possible standards and you feel sure you can afford to start at a higher level, try another lender. In addition to banks, there are savings-and-loans and private mortgage companies, with enough variations that one may grant the same type of loan another turns down.