Market-Ready Real Estate: Credit in Today’s Market

Owning a business and buying a home are two key signposts on the path to the American dream. But getting credit to grow that business or buy that home hasn’t been easy lately. In this tight market, how can hopeful business owners or homebuyers  improve their credit profiles?

    “Complete disclosure is the best policy when you’re trying to get a business loan,” says Mike Ross, chairman of Jefferson Bank and Trust. “Maintain an ongoing dialogue with your banker. If you’re not doing well financially, the worst thing you can do is try to hide it.”

    Ross’s idea of a good risk is “any business that’s profitable, of course—unless there are mitigating circumstances for a loss. If you lost a major client but can prove you’re gaining new business, for example, we’re more likely to back you.”

    Commercial real estate is still attractive to banks as collateral, as long as it’s income-producing, he says. “The last resort for any bank is repossession or foreclosure—we’d much rather have the owner dispose of the collateral themselves. It’s a better outcome for everyone.”

    Andrew Hereford, president of Parkside Financial Bank & Trust, says credit will continue to be tight in 2009. “But tight compared to what?” he asks. “Arguably, it was too loose before. For the next year, banks will be trying to get their house in order and take care of clients they already have.”

    Meanwhile, anyone seeking a loan from Parkside, which lends mainly to small and mid-size businesses, will have to demonstrate “a proven, ability to repay the loan, based on the cash flow of the business and evidence of revenue and profitability,” Hereford says. “We’ve always done business that way.”

    Before issuing a loan, Hereford and his associates ask clients to consider what would happen if sales decreased by 20 percent, a sobering question in today’s uncertain economy. “What if they have to lower prices, as many companies have been forced to do recently?” he says. “What impact would it have on their profitability and cash flow? If a business has enough reserves to survive a decrease in sales, it looks like a better risk.” Having a secondary source of repayment also improves a client’s credit profile. “If there’s another source of personal income the borrower can use to supplement his ability to repay the loan, that’s always helpful.”

        According to Mark Cooper of USA Mortgage, “Mortgage financing is easy for homebuyers, but the days of zero down payment are over, and you’d better come prepared to have your income verified.”

        Cooper says that credit started loosening up as soon as Freddie Mac and Fannie Mae were taken over by the government. “If you’re looking for financing now and you want a government-backed loan, all you need is a credit score of at least 600 and a down payment of 3 1/2 percent,” he notes. “Federal Housing Administration loans go up to only about $270,000, so the FHA is more laid-back when it comes to credit scores.” He adds that credit will remain tight for jumbo financing, or loans that exceed $417,000. “Those require a higher score and a down payment of 20 to 25 percent.”

    Now is a great time to buy a home, Cooper says, because properties are available at a discount. “People can buy homes that are actually on sale, not just for sale,” he says. “It’s also an excellent time to refinance, with 30-year fixed rates hovering around the 5 percent mark. If you currently have a loan with a rate over 6, refinancing could save you a lot of money.”

    Cooper disagrees with those who blame low-income homebuyers for the implosion of the real estate market. “Owning a home is the American dream, who can fault anyone for trying?” he says. “It was more the lenders’ fault for not analyzing consumer needs. Too many lenders were after a quick commission. Reputable lenders always counsel their clients about when to buy a home, not just how.”