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By Michelle Koetters

RISMEDIA, Nov. 5, 2008-(MCT)-You’re approved. Maybe. And there might be strings attached. People who have good credit and down payment money shouldn’t have a problem getting a home loan, said Larry Maschhoff, president of Bank of Illinois in Normal. For everybody else, the story might be different.

“On the other side of that, I don’t know if we can give them a loan,” Maschhoff said.

Borrowers who want to get a new home mortgage, refinance a home loan or open up a home equity line of credit are up against some challenges in today’s crumbling financial world. Times have changed from the days of easy lending and no-money down loans, maybe, local bankers say, more to the way things should be.

The number of 100% financing offers available in Central Illinois has diminished, meaning many people need to have cash up front for a mortgage. More borrowers also have gravitated to Federal Housing Administration loans that allow grants and gifts to cover a down payment. The importance of credit scores also has grown when it comes to qualification — and the loan’s interest rate.

Still, it’s mostly business as usual in the Twin Cities, said Randy Clark, vice president of Busey Bank in Bloomington.

“People are still able to buy, refinance, get home equity lines of credit,” Clark said. “You may not get the best rate … but you can still get a loan.”

Tiered pricing means borrowers could face a quarter-percent to half-percent more in interest rates depending on credit scores, Clark said. The subprime market that allowed loans for people with lousy credit has dried up, he said. Busey, however, still offers 100% financing depending on a person’s credit, he said.

A credit score above 600 means you’re in good shape while a score below 600 presents a challenge, Clark said.

But Maschhoff said customers with credit scores above 600 previously could get a loan with no problem; however, their chances now are slim unless their score is closer to 700.

People also have a far easier time closing on a loan if they have a down payment closer to 10 or 20%, Maschhoff said. The bank has opportunities for people who put 5% down, but they’ll pay more interest, he said.

The gap between interest rates on a 20% down payment versus a 5% down payment could be as high as 2.75% if a borrower also has a low credit score, Maschhoff said. The difference is smaller, around a quarter percent, if a person has a low down payment but one of the highest credit scores, he said.

The right fit for a borrower is not always immediately obvious now, said Dave Usiak, a loan officer with Mortgage Services III, based at First State Bank, 502 N. Hershey Road, Bloomington.

“We’re having to rethink our strategy when we talk to clients,” Usiak said.

For example, someone with a credit score around 650 will find it’s more expensive to get a conventional loan because their interest rate will be at least a quarter-percent higher than someone with a 720 score, Usiak said. A Federal Housing Administration loan, however, wouldn’t carry an extra interest charge in that example, he said.

Recent first-time home buyers generally have put down from 3 to 5%, said Will Grimsley, a real estate agent with Prudential Snyder Real Estate in Bloomington. But most clients have put down 20%, he said.

Buyers have a different attitude from the days when they sought to put the least amount down, he said.

“I’ve seen some people taking money out of 401(k)s or out of their savings accounts to put into their house,” Grimsley said. “Their investment is going to be safer.”

Improve your odds

Area lenders say customers with good credit shouldn’t have difficulty obtaining a mortgage, especially if they have down payment money. Follow their advice to improve your chances of getting a good loan.

Save money for a down payment: Individuals still can get 100% financing from some banks in a couple of cases, such as if they have good credit history or live in rural areas. However, many banks now require at least a 3% down payment, and it’s easier to get financing if you have closer to 10% or 20% down. Your interest rate often will be better if you put up more money, too. Also, ask about grants.

Improve your credit score: Credit standards have tightened and their importance stressed these days. A better credit score will help your chances of getting a loan and could impact the percentage you pay in interest. Have your banker pull your credit and review it with you. To have better credit, pay your bills on time, fix any errors and be careful of how many times your credit gets pulled.

Copyright © 2008, The Pantagraph, Bloomington, Ill.
Distributed by McClatchy-Tribune Information Services.