Simplifying The Market

Sunday, March 1, 2009

Mortgages That Survived The Credit Crunch

Excerpt From My March Newsletter in Realty Times

Today's mortgages are a far cry from boom time home loans, but they do exist and some lenders have money to burn. "People used to qualify with stated income. Now there is more documentation. And they aren't just documenting your income, but looking for assets in addition to your income and low debt-to-income ratios and low loan-to-value ratios," said Asmaa Egal, mortgage broker, Loan Republic Financial in San Francisco.
The new brand of home loan has been customized with tighter controls and fewer defects to replace old mortgage models that crashed and burned when the economy hit the skids. "You have to qualify. You have to prove your income. They have make-sense underwriting," said, Quincy Virgilio, 2009 president of the Santa Clara County Association of Realtors.
FHA-insured mortgages
The new darling of the homebuyer set, Federal Housing Administration-insured mortgage programs, have been available for decades. especially for low- to moderate-income families who may not meet requirements for conventional loans.
But with new loan limits as high as $625,500, they've become especially attractive in high cost areas. FHA loans are expected to account for 25 percent of the mortgages signed in 2009, according to the National Association of Realtors. Because of previously lower loan limits, FHA loans amounted to less than 4 percent of homes sold from 2003 and 2006.
The new FHA model also comes with low down payments and eased credit requirements.
"They are much more lenient (compared to conforming Fannie Mae and Freddie Mac mortgages) on how they look at credit scores. The score can be in the 600s vs. 700s, said Cheryl O'Connor, a finance expert with O'Connor Consulting in Danville, CA.
FHA features include:
• As little as 3 percent down.
• Financed closing costs.
• A 1 percent (of the mortgage) ceiling on the amount lenders can charge for closing costs.
• No prepayment penalties.
• Relaxed debt-to-income requirements.
• FHA-approved lenders only.
• FHA-approved appraisals only.
Virgilio says buyers who don't have 20 percent or more down will pay an upfront mortgage insurance fee amounting to as much as 1.75 percent (of the loan) and a monthly mortgage insurance premium that effectively tacks on another 0.5 percent to the interest rate.
"But you can structure your loan with participation from the seller paying closing costs. Not down payment assistance, but closing costs, but in this marketplace the seller is going for that," said Virgilio.
The best rates (typically fixed, rather than adjustable) go to those who have financial reserves, savings or investments amounting to at least two months worth of a PITI (principle, interest, taxes and insurance) mortgage payment.
Likewise, the best deals go to buyers with a 30 to 33 percent debt-to-income ratio when the debt includes housing and all other monthly debt payments.
In addition to FHA home-buying loans, the "Housing and Economic Recovery Act of 2008" created "Hope For Homeowners" which allows troubled mortgage holders to avoid foreclosure by refinancing into a more affordable, FHA Secure mortgage, provided Uncle Sam gets a piece of the equity-growth action and provided the existing lender approves.
Members only
Credit unions largely survived the credit crunch because, as non-profits, the fundamentals apply. They take in deposits. They make loans based on sound underwriting principles. They charge more on those loans than they pay on deposits.
Without the profit motive, there was no incentive to get involved in the subprime racket, no reason to sell and repackage loans as investments and no need to otherwise venture into untried and untrue investment schemes.
Along with fixed-rate 30-year mortgages at rates often lower than banks they also offer conventional adjustable rate mortgages (ARM) and hybrids all with rates typically lower than conventional lenders. "Credit unions have a tendency to be more lenient if you have a bank account with a credit union," O'Connor said.
Credit union originations rose a whopping 10.1 percent during the first half of 2008, according to the industry's federal regulator, the National Credit Union Administration (NCUA). Conventional mortgage lender loan originations took a nose dive, falling 17 percent during the same period.
Rural home loans
Don't get your knickers in a knot over the term "rural." Loans backed by the United States Department of Agriculture's (USDA) Rural Development Housing and Community Facilities Programs are limited, but you don't have to grow corn or raise chickens.
The loans are for:
• People living in designated rural areas where the population is less than 20,000.
• People with incomes under 115 percent of household median income for the area. In most areas, the upper income limit for borrowers will be $60,000 to $70,000 per year.
• People buying homes, not refinancing or taking out equity loans.
USDA Programs include no-money down loans, home improvement and rehabilitation loans and grants, construction loans, loans for minorities and true to the work-ethic of rural life, sweat-equity loans that require buyers to help build their own homes.
Local, state agencies
O'Connor says don't overlook local -- city, county and state -- housing assistance programs that often cater to first-time and or low- to moderate-income home buyers as well as government and service workers including teachers, police officers and fire fighters.

Written by Broderick Perkins
Read the rest of my March Newsletter here

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