The media would have you believe that the mortgage industry is in a shambles and that every home sold and loan processed for the last five years is turning into a foreclosure. If you’re a pessimist, you might even believe that “the end” is near for the mortgage industry. For sure, the mortgage industry has changed, but for many that creates outstanding opportunity for purchasing homes. What should you expect in the years to come? Here is one perspective:
What’s out:
- 100% Financing - Banks and lending institutions have mostly stopped entertaining home loans offering 100% or greater financing. Earlier this year the California Association of Realtors said 41% of first-time California buyers were getting 100% financing. Now, in the final months of 2007, lenders won’t make loans without, at the very least, 5% down and most are requiring 10% or more.
- Adjustable Rate Mortgages Offering 4 Payment Options - Made popular by companies like World Savings, this loan product allowed the consumer to “choose their payment” from four available options - generally 15 year interest and principal, 30 year interest and principal, interest only, or negative amortization that allowed consumers to make the lowest possible payment and apply the difference between that and the interest only payment to their loan balance. Basically, this loan offered the option of turning your traditional mortgage into a mortgage with an open home equity line for applying a portion of your payment. These loans types very were popular and, for the most part, have been discontinued due to higher than average default rates.
- Interest Only Loans - With over 28% of Northern California loans and refinances financed by interest only loans, this popular tool was a quick way to reduce payments by allowing borrowers to pay only the interest on a loan, leaving the principal in tact. While these loans are still available, lenders are typically requiring proof that borrowers can pay both the interest and the full principal when it becomes due later on.
- Subprime 2/28 Loans - Nearly all the biggest subprime mortgage lenders have stopped making these loans. The 2/28 offers low “teaser” interest rates for the first two years, and then resets to higher floating (adjustable) rates that can add significantly to the monthly payment. In 2006, 80% of subprime loans nationally were 2/28s and they were typically made to people with weak or bad credit histories. In 2006, 22% of home purchases in Northern California were with subprime loans.
- Stated Income Loans - Lenders have almost entirely stopped giving money to people who simply “state” their income on a mortgage application. These loans were very popular for a while, because they allowed borrowers with a strong credit score to “state” their income to justify the price of the home that they were hoping to purchase or refinance. The price of the loan was generally slightly higher, but they allowed borrowers to get into properties that they might not otherwise have qualified for.
What’s in:
- 30-Year Fixed Rate Loan - The traditional workhouse loan with its unchanging monthly payment across three decades is back.
- Mom & Dad - Parents are offering gifts to their children to reach a down-payment of at least 5% (often taking equity from their own home). Parents are also making sure their children get a fixed-rate loan, too.
- Saving Money and Renting for Another Year or Two - It is old-fashioned, but real estate agents say building up savings can be the ticket to buying a house. In today’s market, in certain markets, renting a home can even be less expensive over short periods than buying a home. As long as renters are judicious in saving towards their goal, this may be the only way to get into today’s more credit stringent market.
- Income Verification - Lenders now want to know all the specific details of a borrowers’ financial situation, including their exact salary (with pay stubs and tax returns) and other sources of income.
- High Credit Score - Lenders say a credit score of 675 or higher - and a down payment - will help deliver a mortgage to borrowers who intend to live in the house.
So what does all this mean for you? If you have the credit score, verifiable income, and a down payment, buying a home is no more difficult than it was before. Even if you’re missing one or more of these components, you may still have viable opportunities through creative purchasing strategies and by working with sellers. Best bet? Start with an expert - talk to a professional, full-service real estate broker today.
– article brought to you courtesy of Michael J. Duffy, J. Rockcliff Realtors