This is written by my good friend and mortgage broker James Adair
Mortgage Manager at Mortgage Trust Inc.
(1/27/2009) As we plunge deeper into this economic darkness, the US government sponsored residential mortgage industry is becoming one of the rare places a regular family can go to seek some BENEFITS. The government has committed to purchasing mortgage backed securities (Fannie mae and Freddie Mac mortgage bonds, also referred to as MBS) for the next 6 months, in an effort to keep mortgage rates low and stimulate both purchase and refinance business. As that 30 year fixed rate hovers around 5% and below, many homeowners are in a position to refinance and open up some monthly cash flows.
One of the big changes we’ve seen in the last 6-12 months is a steady elimination of programs. Interest only options are no longer available on agency loans (agency = backed by Fannie/Freddie), and Adjustable rate structures, while still available, have had much higher rates than the 30 year fixed loans. So the only loan any lender is discussing with their clients right now is a 30 year fixed. Now, there are a few varieties of the 30 year fixed- the Conforming, the USDA, the VA insured, and the FHA insured.
The Conforming fixed, is the standard agency mortgage that we all know and love. The rates are indeed low right now, but there are some caveats to this. The pricing structure has changed dramatically, and the only folks who actually qualify for the BEST AVAILABLE PRICING are those with credit scores over 720, equity positions of 20% or higher, and verifiable income. Now then, if you have credit below that 720 threshold, and are still above 680, it is likely that you’d still qualify for some great savings, but the rate you get will have some risk premium built in to the interest rate. The minimum down payment required for the conforming mortgage is 5%.
The conforming fixed is also the only mortgage that allows for second homes, and investment purchases. The second home purchase pretty much acts like any other mortgage, the borrower’s credit and income just have to support all the debt that comes along with it. The Investment mortgage or “non-owner occupied” mortgage has become increasingly expensive. Fannie and Freddie have changed their risk premium structure to make these loans very expensive if the borrower has less than 25% equity (or 25% down if a purchase). These investor loans now require a minimum of 20% down, but the borrower will get a huge break on rate and fees if they go with that extra 5% down. Where the rate premium used to be about .5% higher on investment, I’m now seeing that spread widen, and you can expect a full 1%-1.5% higher interest rate on a non-owner occupied mortgage compared with a primary residence mortgage.
The USDA fixed, is a loan insured by the Dept. of Agriculture. Its purpose is to stimulate ownership in rural areas, and this loan will give the borrower 102% of the purchase price! The only catch is that the property has to be within certain USDA approved tracts. Some areas in our marketplace that qualify for USDA funding are: Sherwood, Boring, Estacada, North Plains, and parts of Yamhill County. This is a great loan! the rates are just as good, there is no downpayment required, and while there is an upfront Mortgage insurance premium due at close, there is no MI in the monthly payment.
The VA fixed, is a fixed rate mortgage very similar to the USDA loan in that there is an upfront MI premium at close, but no monthly MI. However, there is no geographical restriction to where a VA mortgage can be delivered. The only restriction is that the borrower has to have served in the US military with a standard discharge. VA loans can go for owner occupied properties only, but can be used for 1-4 units (single family through four-plex as long as the borrower lives in one of the units).
The FHA fixed, is fast becoming the “swiss army knife” of the mortgage industry. The Federal Housing Administration insures huge pools of loans dedicated to the more marginal borrowing profile. There is no sliding scale of risk associated with lower credit scores, although, most lenders have made 600 the minimum fico score required for the FHA loan. The downpayment is a minimum of 3.5%, there is an upfront MI premium due at closing, but it gets built into the loan amount. This upfront premium subsidises the monthly MI, and that is heavily discounted. On a purchase, I’m seeing regular working families (2 incomes of around $30k each) qualify to borrow over $250k on an FHA insured loan. The 3.5% down payment can come from a family gift. Non-occupying co-borrowers can help improve debt to income issues, and first time buyers can still qualify for the $7500 tax credit if they close before the end of June 2009. Even they’ve filed taxes for 2008, you can file an amended return and collect that credit immediately upon purchase. The FHA also allows borrowers to purchase properties up to 4 units, given that the borrower occupies one of the units.
In addition to these fixed rate options, there are still a few players in the “non-conforming” mortgage sector. A non-conforming mortgage is one that doesn’t conform to agency guidelines. The most common of these guidelines that needs to be served is the “Jumbo” loan amount. A jumbo loan is one that exceeds the agency maximum of $417,000.00. There are a few big banks that will serve this market segment, but most will require:
1. outstanding credit
2. outstanding downpayments/equity positions
3. Low debt to income ratios
Also I’m seeing that the fixed rate non-conforming pricing is very unattractive, and virtually everyone is getting a 5 year or 7 year fixed rate ARM. These loans can also qualify for interest only pricing in many circumstances.