It’s hard to avoid negative news about the mortgage lending business. Defaults are rising, subprime lenders are closing shop, and fortunes could be lost as mortgage-backed securities go up in smoke. Sounds ominous, but how will these trends impact someone who’s trying to buy or sell a home?
The first thing to understand is that lenders are moving back to basics. No- and very low-down-payment mortgages are available only to buyers with high credit scores. This means no more 100 percent and 95 percent mortgages for subprime borrowers.
Lenders are also backing away from low-documentation and stated-income mortgages. Many lenders now require buyers to have a cash down payment, good credit and the ability to verify income.
For years, home buyers stretched the price they could pay by using adjustable-rate and interest-only mortgages. Not long ago, lenders qualified buyers for these loan products based on the lower initial rates and on interest-only payments. Now, borrowers must qualify based on the fully indexed rate and amortized payment. In other words, qualifying for a home mortgage is more difficult.
Appraisals are also being scrutinized more carefully. If home prices have dropped in your neighborhood, the lender’s underwriter might knock the appraised value down 5 percent and require you to increase your down payment accordingly. Some lenders now require two appraisals. Before the credit crisis, this was required only for loan amounts above $1 million. If your contract includes a contingency for the property to appraise for the purchase price, make sure that you have underwriting approval before you remove the contingency.
HOUSE HUNTING TIP: Buyers who were preapproved a month or more ago should check with their loan agent or mortgage broker to see how the credit crunch impacts them. Many mortgage bankers are either now out of the business or they’re not issuing new loans. There were cases recently where fully approved buyers were unable to close because their lender stopped funding mortgages. Some real estate experts now recommend that buyers not remove their financing contingency until their loan is funded.
This can pose difficulties for sellers who often don’t want to pack up and move out until they know the sale will close. Loan funding typically doesn’t occur until the day before or the day of closing, depending on where the property is located. One way to protect the seller if the buyer’s financing contingency is in effect until funding is to include a provision in the contract for the sellers to deliver possession of the property to the buyers several days or so after closing. This way the sellers aren’t caught having to move back in if the sale doesn’t close.
The good news is that it’s business as usual for confirming loans that are sold to Freddie Mac and Fannie Mae. Unfortunately, for buyers in high-priced markets like the San Francisco Bay Area, these loans don’t help many buyers. The loan limit for conforming loans is $417,000.
Rates on jumbo loans — loans for more than $417,000 — have increased 1 to 1.5 percent with some lenders. However, it’s still possible for well-qualified buyers to find reasonably priced financing by going to a financial institution like Bank of America or Citibank. Lenders that have the ability to make loans to hold in their portfolio rather than to sell to investors are a good source of financing now. For instance, on Aug. 20, over a week after the credit crisis broke, Bank of America offered a 7.25 percent rate on a 30-year fixed-rate jumbo mortgage, with one point.
THE CLOSING: Until the dust settles, sellers should be wary of accepting an offer from a subprime buyer, or from any buyer who doesn’t have approval from a lender that’s likely to be around long enough to fund the loan.
Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.