Mortgage Loan Financing: Back to the Future
If mortgage finance is the art of the impossible, what is possible right now for buyers and sellers worried about rising mortgage rates, market uncertainty and soft home prices?
Plenty. Although certain aspects of today’s marketplace may look scary, most of the traditional problem-solving tools of home mortgage finance are still at the disposal of buyers and sellers.
In the end, mortgage rates of 6.75 percent and higher needn’t be a deal breaker or impediment to either selling or buying.
Just talk to veteran mortgage or real estate professionals who’ve worked through periods of double-digit and high single-digit mortgage rates and negative prices in the 1980s and early ’90s for perspective.
For example, for buyers with limited cash on hand and borderline credit who might have signed up for a zero-down bad credit mortgage two years ago, a program available nationwide through Freddie Mac may be better.
It’s called “Home Possible” and comes in several variations, including the zero-down-payment “Home Possible 100.”
According to Freddie Mac’s website, the program allows seller contributions of up to 3 percent of the total costs and does not require any set amount of financial reserves by borrowers.
The maximum home loan amount is $417,000.
The back-to-the-future aspect is that, unlike the stated-income underwriting, Freddie Mac requires home mortgage applicants to go through its traditional “Loan Prospector” automated underwriting system.
This means that borrowers generally need FICO credit scores of 620 or more and must be prepared to verify income and employment.
For mortgage loan applicants with nontraditional credit histories causing them to have artificially depressed credit scores, Freddie Mac will accept old-fashioned “manual” underwriting, as well as look at non-traditional credit records such as rent and utility payments.
That’s a key component for young, first-time home buyers with slim credit files.
Skeens is also bullish on the oldest mortgage program around — FHA loans backed by the Federal Housing Administration — especially for mortgage refinancing out of mortgages that aren’t consumer friendly.
Once Congress passes pending legislation allowing zero down payments and 40-year terms, “we’ll be doing a lot more FHA loan transactions for home purchasers,” one mortgage lender said.
FHA loans currently require 3 percent down payments, as well as employment, income and asset verifications. Unlike bad credit home loans, they come with lower rates and no prepayment penalties.
Back-to-the-future sellers and buyers should also be looking closely at still another time-tested technique: rate buy-downs.
The mortgage can take almost any form — fixed-rate, adjustable, interest-only or a hybrid — but the net result is the same: The home loan rates are reduced for a period of years as a concession to the buyer.
Heads-up sellers and their real estate agents should consider advertising the availability of buy-downs to bring in purchasers. It’s an effective tool, and just about any lender can arrange it.
Still another back-to-the-future concept for today’s market: seller “take-backs” or “carry-backs.”
A staple of the financing arsenal during the 1980s — a time when a conventional mortgage for a buyer with good credit was over 15 percent — seller take-backs are deferred-payment notes offered by sellers on more attractive terms to assist buyers.
Properly structured and documented by experienced attorneys or investors, take-back notes are readily saleable for money in the private secondary note marketplace. Sellers can also hold on to them as investments, pocketing steady income.
A sign that this form of private financing may be poised for an expansion was the recent acquisition of CircleLending LLC, a privately held Waltham, Mass.-based company specializing in intra-family and seller take-back financing by billionaire Richard Branson’s Virgin Group PLC.
SOURCE: Los Angeles Times