With the housing market in turmoil after the sub-prime mortgage crisis and the Federal bail-out of Freddie Mac and Fannie Mae, the basic requirements to receive a mortgage have tightened up. According to at least one real estate financier, to get a mortgage these days you"practically have to walk on water". While this is a bit of an exaggeration, it is true that it's far harder to qualify for a mortgage now than it was just two years ago. It's not, however, any harder than it was before 2000, when the real estate market went into hyperdrive. According to many professionals in the credit industry, what we're seeing is a return to the norm.



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.