Top 10 Ways to Navigate the Credit Mess

We?ve written quite a bit lately about the mess that the market is in ? from mortgage backed securities, CDOs, SIVs and in general malaise striking every bank across the country (and heck, even around the globe); but we haven?t given some practical advice in a long time. Well we?re changing that tonight.

Some people are still looking to buy a bargain and others are being forced to refinance. While it is my position that now is not the time to buy, if you are looking to do so here?s some guidance to get you through a drastically altered mortgage landscape.

Here are Blown Mortgage?s Top 10 Ways to Navigate the Credit Mess (whether you?re a home buyer or a refinancing owner). Sure there?s more than 10 ? but it?s a nice round number and should get you off to a good start.

1. Get multiple offers ? The mortgage lending space is very turbulent and unsteady. Even large lenders are not sure bets these days; and with mortgage guidelines and programs changing regularly you won?t know if your home loan is done until it?s done. I recommend (regardless of market) that everyone get at least a back up offer; but even more so these days, you need to have at least two solid mortgage options so that you?re not left at the alter by yourself.

2. Know your credit ? Credit has become increasingly tight. To the point where only the people with the best credit have access to the most wide-open underwriting guidelines. Unfortunately if you?re like the rest of America you probably qualified for favorable home loan terms under more favorable underwriting guidelines. Ergo, in order to get the most favorable terms today you need to have the best score possible. You can?t begin this process until you know your score. I recommend myFICO.com to figure out and manage your credit score (and yes I get paid if you sign up); but I?ve been recommending myFICO.com for years before getting any compensation and use it myself.

3. Improve your credit scores ? This goes with the above. You need the highest score possible. No matter what your score in 9 out of 10 cases more points are going to mean lower rate and better terms. Once you have your baseline credit score with myFICO.com talk to your mortgage consultant about rescoring you to a higher score. A good mortgage professional should be able to share with you a few options to improve your score quickly. See my 5 part credit series for more information. We?re looking for quick wins here with minimal pain. It may be that a mere 10 points reduces your interest rate by a quarter or makes a program available to you that you currently don?t qualify for.

4. Give yourself time ? You need to give yourself time to prepare the strongest case for gaining financing (see #5). This means that if you know you have to refinance in a few months (due to your ARM resetting or option arm recasting) you need to start working now on your finances. Even if you are 6 to 12 months out ? start working now. Order a copy of your credit report, eliminate frivolous expenses and begin to build your saved assets, repair or correct erroneous or derogatory credit items, bone up on your mortgage IQ so that you can have a clear picture of your options when it comes time to shop.

5. Build a strong case ? Over the last few years banks wanted to give you money. Now, they are looking for reasons not to give you money. (That?s a generalization and not entirely true, but it captures the sentiment.) So you need to build a strong case for financing including a strong credit score, sizable savings or other assets that cover at least 3 to 6 months of your mortgage payment, stable credit history (no big new liabilities or credit card balances), and more. Start laying the foundation as soon as possible to build the strongest case you can for financing.

6. Pull your documentation together ? Now is as good a time as any to review your current mortgage note, and read it to see if you have 1) a prepayment penalty 2) adjustable rate mortgage features or 3) negative amortization. If you have any of those understand when they come in to play and plan accordingly. Then be sure to get together the rest of your necessary documentation ahead of time so that you can provide an accurate assessment of your financial situation early in the loan process. This will do wonders for you in terms of shopping for a home loan and closing your transaction quickly.

7. Do the appraisal yourself ? If you are buying a property do the appraisal yourself; from a self-selected appraiser. You need to get a real market value, not an inflated one based on the highest comparable sales in the market. Talk to your appraiser and insist that they use realistic comparable sales and that they are conservative with adjustments such as upgrades, etc. Then you have to do the due diligence yourself to ensure that the deal is really ?a deal? in that market area. Use a trusted Realtor and do the leg work yourself. Your ?deal? may be a rip off in 6 months if you make an uneducated decision.

8. Know your options ? Do you have to buy? Can you rent? Do you have equity in your home to refinance? Should you refinance? Should you short sell? Should you buy a foreclosure or a short sale? Can you modify your loan or lock in to a fixed rate? Know and consider all of your options before diving blindly in to the process. The water is too rough to make a decision unprepared.

9. Don?t delay ? Once you decide to move forward get the process completed in an expedient manner. The longer your home loan financing drags on the more problems it becomes exposed to. Rate lock expirations, changing mortgage underwriting guidelines and the reduction or elimination of mortgage products are all very real possibilities as you move through the financing process. The sooner you?re out of the line of fire the better. Financing that seems available today may be gone tomorrow. That?s reality people. Plan and act accordingly.

10. Get confirmation at every step ? Documentation is key in any financial transaction of this magnitude and is especially helpful in such a tough market. Get copies of rate lock commitments, revised good faith estimates and loan applications, purchase agreements, short sale offers, everything. Keep them in your file and ensure that the output of the process matches the agreements that you have committed to each step of the way. This ensures that your interests are protected through out the process and you get what you started out looking for.

There are obviously more steps to mortgage financing and buying and selling in such a complicated market; but these are 10 that can get you off to the right start. What do you think? What else would you add?