Loans are available, but there are new rules

Oct 09, 2008 (The News & Observer - McClatchy-Tribune Information Services via COMTEX) -- RATE | Quote | Chart | News | PowerRating -- The Federal Reserve cut its leading interest rate Wednesday, but the ripple effect that usually comes from such a cut isn't expected to help consumers soon.

Banks continue to tighten their requirements for mortgages, car loans and in-store financing. Gone -- perhaps for good -- are the days of no down payment and 100 percent financing.

Instead, lenders want to see verification of income, a good credit score and a down payment.

However, that's not to say those loans are impossible to get.

"There's this misperception in the marketplace that nobody can get a loan," said Greg McBride, senior financial analyst for financial Web site Bankrate.com. "Loans are being closed every single day. It's just that the rules of the road have changed. ... We've gone back to more traditional lending principles."

For the past year and a half, lenders have been increasingly skittish about handing out cash.

The rate cut will help a little, in very specific areas. Interest rates should drop on adjustable-rate home equity lines of credit, which are tied to the prime interest rate. But mortgage rates and car loan rates are not tied to the Fed's prime rate, and therefore the cut has little effect on how those loans are being treated.

It will be awhile before the Fed's action has much impact, particularly for home buyers who have been finding it more difficult to acquire financing for months.

Newlyweds Matt Vaughan and his wife, Carrie, were pre-approved for a no-money-down mortgage of up to $180,000. After months of house hunting, they fell for a 1,435-square-foot home in Holly Springs.

But a couple of weeks before the July closing, the lender had bad news: The 100 percent financing deal was no longer available, and they'd have to come up with a 3 percent down payment, or about $5,000, to buy the $167,000 home.

"We didn't think it was going to be able to happen," said Matt Vaughan, 25, an account executive at a Raleigh marketing firm.

With their $2,000 in savings being rapidly depleted by rising costs, Vaughan turned to his grandparents. They happily gave him the down payment.

"It takes a stab at your pride," Vaughan said. "It hurt me to have to ask, but I felt relieved that they were so gracious."

Joe O'Keefe is another who ran headfirst into the credit crisis. A year ago, O'Keefe and his wife began seriously discussing opening a wine store with their bank, which was eager to help them finance it. This spring, when the O'Keefes were ready to take out the loan, the financing had dried up.

The couple ended up paying the $60,000 in startup costs through a home equity line of credit, savings and credit cards.

"We're investing everything we have into this," he said. "And we are the antithesis of risk-takers."

Wine 101 opens today in Wake Forest. O'Keefe said that, so far, he has used only about 30 percent of his home equity line of credit, but he's worried about the bank freezing that, too.

"I went a couple of weeks ago and did a transfer just to see," he said. "I didn't need it, but I did a transfer just to see if it would work. And it did."

Tough to buy TVs, too

The borrowing problems are spreading to all kinds of businesses. Go to buy a car or even get in-store financing for a big-screen television and you'll also need a good credit score and a down payment.

Lenders also are spending more time verifying a prospective borrower's income and employment. And they're weighing assets, such as savings and investments -- things that could be sold to cover a loan in case of unemployment.

"As recently as six months ago, you could get a loan without verifying your income, as long as you had decent credit," said Charles G. McClure III, a mortgage planner at Alera Financial in Raleigh.

The definition of "decent credit" is shifting, too. A year ago, somebody with a credit score in the 500s could be approved for a mortgages, he said. Today, the threshold is closer to 600.

"The loopholes that a lot of people could sneak through have gone away," McClure said. "I've got a lot more turndowns than I do approvals now."

For car loans, Bankrate's McBride said, 10 percent down and a good credit score around 680 or 700 should work.

But if you're trading in a vehicle and are "upside down" on the loan, meaning you owe more than the vehicle is worth, you can almost forget about getting a loan.

"I don't care how good your credit is, but if you go into the dealership owing more on your trade than what it's worth and with no money for a down payment -- no deal," McBride said.

Though lenders are requiring more from borrowers, that hasn't deterred people from applying, said Larry Wilson, president of Coastal Federal Credit Union.

Coastal Federal has actually seen an increase in both home mortgages and car loans this year, because credit unions typically offer slightly lower rates on mortgages. It's also benefiting as auto dealers look for new financing options as their traditional sources dry up.

In September, Coastal Federal's number of mortgages issued was twice that of a year ago, Wilson said. The credit union financed 2,000 auto loans in September.

Coastal's criteria have also tightened, Wilson said. It now requires 3 percent down, for instance. He added that the onus is on lenders to closely examine each application to ensure the person can actually pay back the loan.

"Let's say an application comes in from a cashier at a grocery store, and it says they make $70,000," he said. "We ask for verification of income."

Brian Rashid has felt the effects of the new vetting. His family owns and operates Raleigh's Tri-Point Truck Center, a business that sells large trucks to businesses. In the past six months, Rashid said, 35 percent more customers have had their financing rejected.

"We had one customer who bought a truck from us who has good credit -- someone who we'd normally think would be a slam dunk in terms of getting financing, and he was having trouble," he said.

"We sent his credit application to the same place that financed his first truck with us, and they said it was too soon."

For customers who have marginal credit or a few negative items on their credit reports, the stories are worse, Rashid said.

"Previously you had a 50-50 shot of getting someone like that financed," he said. "Now it's like you see anything like that and it's like, 'Oh, God.' "

sue.stock@newsobserver.com or 919-892-4649

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