Austin Living Guide

finance

Recent Mortgage Changes-Beginning of the New

by David Shipp
March 25, 2008 | 0 Comments

As a result of the recent mortgage delinquencies, foreclosures, and tighter underwriting, I have put together what I will term, “beginning of the new”.  This will ultimately affect what and how we will purchase real estate.

First, let’s imagine ourselves as independently wealthy or perhaps we represent those who are.  Our investors are interested in making money on their money and willing to take some risks to get there.  Some of those risk takers are investing in several things at any given time.

Now we find a demand for certain loan products- specifically mortgages.  These mortgages are actually mortgage bonds that are backed by investors, government agencies, Fannie Mae and Freddie Mac.  These bonds are secured by money from our investors and entities and then sold to various banks and lending institutions. Then, they are marketed through several channels (ex. Internet, wholesale brokers, retail bankers, credit unions etc).

Everything is going great for some of the homeowners until the economy begins to slow, foreclosures shoot up and now the investors are mad. They want their money back! You begin to do so, but it costs you millions to liquidate and redeem a longer termed investment.  Hence, you see the story of Bear Stearns and the aftermath of sub-prime mortgages. Keep in mind, not all foreclosures are sub-prime.

So now the market for mortgages has radically changed where the investors are NOT as interested in that type of risk.  And in addition, the investors who still invest and comprehend mortgage backed securities, want the amount of risk reduced, and as a result, tighter qualifications.

The latest changes affecting homeownership is in several categories: down payment requirements, credit scores, mortgage insurance, and second mortgages.

Let’s discuss the infamous 100% financing-no down payment.  By and large, many of the foreclosures were the result of 100% financing.  The borrower could actually get a loan (with high credit scores) and borrow as much as 45% of Gross Income to qualify for mortgage.  Unfortunately for those who haven’t purchased and owned homes, liberal guidelines and one slight change (baby, job loss, medical urgency) –the snowball rolls.  Some people felt that by avoiding the mortgage insurance and having second mortgages, they could save even more.  Not always and in some cases the rates were very high.  Now a first time or investment property buyer can no longer qualify for a second mortgage due to the number of defaults and the lack of investors. At the end of March 2008, all 100% loans are gone.  Combined 100% loans could follow.

FHA-the wave of the future! Great for first time home buyers.  FHA loan programs allow for less stringent underwriting.  Since FHA acts as the insurer of these loans, their guidelines allow for actual people to approve loans rather than computers. FHA recently raised the loan limits for the Austin area to $288,750. Another great reason to buy now since rates are so low!

FHA is great for the people whose extenuating circumstances forced them into bankruptcy or got behind some time back on there credit and now their credit scores are down.  A first time home- buyer can really benefit too! The entire down payment and closing costs can be a gift from a relative, non- profit organization, employer and even “sweat equity”.  I had a client who received money from several friends as their wedding gift and they used it to buy a home!

Conventional loans have now changed in the pricing based on FICO scores.  Credit Scores are being considered more than ever and it now can affect the interest rate on your loan! The highest loan amount currently is 97% of purchase price.  There is some discussion about raising the loan limits soon for a temporary time.

On a conventional loan, if your credit score is between 620 and 680, you will pay a higher rate than others. Also, if your score is less than 720, and your using a second mortgage, your rate could be higher.

Now that Mortgage Insurance is tax deductible (with 100k household income or less), it may not be the worst thing to have especially since you can roll it in your loan or even your interest rate.  There are several ways to pay Mortgage Insurance and actually benefit in the long run!

So for now, stay tuned as we see rates starting to come down again- YEA!  I will be in touch.

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