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Mortgage Newsletter

July 2008

Change!

One can only imagine the changes that have occurred or are proposed since the label “Housing Crisis” was placed on the housing industry. Here are some of the changes thus far:
1. 100% Conventional loans are no longer available.
2. “Subprime” market has collapsed.
3. Freddie Mac (Federal Home Loan Mortgage Corp.), one of the secondary market entities to set lending guidelines has lowered the maximum loan to value (LTV) on conventional cash out refinancing from 90% to 85%.

Risk based pricing is now in effect. You pay more based upon your credit scores and loan to value for a conventional loan. As an example let’s say you purchased a home for $125,000.00 and had $25,000.00 (20% to put down). Your loan is for $100,000.00 or 80% of the purchase price. If your credit score(s) were above 720 you would not be assessed an additional fee for your credit score. However if your determined score was 640 you would be assessed 1.75% or $1,750.00 more as part of your loan closing costs than the borrower with the 720 score. Scores greater than 659 would be assessed a lesser fee and scores between 600 and 640 would be assessed a higher fee. If your credit score is under 600 you will likely be denied for a conventional loan.

If you are refinancing to pull cash equity out to debt consolidate, make home improvements or for some other reason, based upon an 80% loan of $100,000.00 you would pay an assessed $375.00 more in closing costs if your credit score was 720 to 739. If your qualifying score was 640 to 659 you would pay $3,250.00 more for the same loan. Again, the assessed fee could be greater or lesser depending on the qualifying score and whether the loan to value is greater than 80% or less than 75%.

VA (Veteran Administration) and FHA (Federal Housing Administration) loans are more flexible to credit scores. If you are borrowing $100,000.00 and your qualifying credit score is between 600 and 619 you will be assessed .25% or $250.00 in additional closing costs. If your qualifying scores are 530 to 579 you will be assessed 1.50% or $1,500.00 for the very same loan.

It is impossible to accurately quote an interest rate and discount points (% of the loan amount) to a prospective borrower, without first obtaining the qualifying credit scores(s).

With many areas of the United States seeing decreasing values, appraisals are being reviewed with more scrutiny. The underwriter of the loan has the authority to change the appraiser’s value, request more information and/or require repairs to be completed as a condition of making the loan.

So what has all this done to mortgage lending? With the elimination of the once very popular Conventional 100% loan we are now shifting back to the historical Government backed loans. These include VA-Veterans Administration, FHA – Federal Housing Administration and RD – Rural Development. With the war in Iraq many of our young people qualify for a 100% VA loan. Families at moderate to low-income levels can qualify for a 100% RD loan. Those not qualifying for VA or RD can likely qualify for FHA financing. Generally, we can place a borrower into an FHA loan with an investment of 3% of the purchase price. FHA allows gift money to be given by a family member to the borrower to meet the 3% requirement. Government loans (VA, FHA and RD) are somewhat more flexible approving borrowers with lower credit scores. Government loans appeal to lenders because if the loan defaults, it is backed (insured or guaranteed) by an agency of the Government.

What does this mean for you? It is more important now, than ever for you to seek professional, experienced, advice such as we offer at Professional Mortgage Services. I have spent my entire career involved in mortgage lending. We have been here to serve you for 18 years and are planning on being here for a very long time to come. We began in 1990 when 30 year fixed rates were 10.5%. RD and 100% Conventional loans did not even exist. Debt ratios of 29% housing and 38% to 41% total were fairly strictly followed and imperfect credit generally was denied. We thrived then and today we have more products, more credit flexibility, more debt ratio flexibility and lower interest rates. The future still looks good. These changes are aimed at placing people in homes who can afford them, to limit foreclosures. Please call with questions; we are always here to serve you.