High hurdles to secure loan
CHOOSING a home loan today is about as much fun as deciding which gas to pump at the filling station. It’s hard not to feel ripped off and, in the case of mortgages, confused.
Interest rates on home loans vary widely among types and lenders, and the documentation process is arduous. The new conforming loan limits have created an extra tier of lending. Some borrowers are struggling to qualify for the new higher-limit loans and wonder whether they are worth the trouble.
“Lending is torture right now, because we have fewer lenders to deal with,” said Mitchell Ohlbaum, president of Legend Mortgage in Los Angeles. Those still underwriting home mortgages “have made it very difficult, even for good borrowers, to get a loan.”
The news isn’t all bad, however. Money is still available for home loans, and the rates are low. On Friday, regular conforming 30-year loans -- those $417,000 and less -- averaged 6%, with one point, according to Freddie Mac. Last year at this time, the average rate was 6.22%.
The once-popular seven- and 10-year-fixed loans that convert to adjustables are no longer in demand, said Marc Shenkman, president of Priority Financial Network in Calabasas. Ten-year, fixed-rate mortgages are about 6%, the same as 30-year fixed, which most consumers prefer.
What’s causing all the fuss in the mortgage-lending universe is that borrowers, agents and brokers must now work a lot longer and harder to ensure a smooth and successful loan transaction.
“To get the best financing, borrowers can’t just make a two-minute phone call to the bank,” said David Soleymani, a broker at First Capital Mortgage in Santa Monica. “If all the legwork isn’t done in advance, deals fall out of escrow.”
Critics of the loose-lending days, who say such sloppiness contributed to today’s market woes, applaud the tighter regulation, which was standard a decade ago. Some mortgage brokers and many seeking loans, however, bemoan the extra red tape.
Now, as in bygone days, borrowers applying for most types of purchase loans must provide two years’ tax returns, current pay stubs and have a down payment available and ready -- with proof of its origin. At least 5% of the purchase price must come from the borrower’s account -- 15% may be a gift -- Ohlbaum said, even if the total down payment is 20%.
Proper documentation
If the down payment is not a gift but is from a tax refund, for example, the borrower must provide a copy of the refund check. It’s also prudent to keep records of IRA distributions, two months’ recent checking account statements, stock sales and any other paperwork relating to income, brokers advise.
To secure a 680-or-better FICO, or credit, score, which is required for loans with the best terms, buyers should run a credit check through one of the major companies at least 30 days before making an offer on a home to clear up department-store late payments, for example, or explain a late mortgage payment.
Borrowers should allow about 60 days total to handle the extra documentation and credit repair and thereby avoid an escrow extension or cancellation.
The biggest lending headaches seem to arise among buyers of higher-priced homes and those who want to refinance their old jumbo loans.
Under the old federal rules, Fannie Mae and Freddie Mac couldn’t buy loans larger than $417,000, the limit for conforming mortgages. Any loan greater than that was considered a riskier jumbo, or nonconforming, loan and borrowers paid a higher interest rate on it.
Under the Economic Stimulus Act, signed into law on Feb. 13 this year, the U.S. Department of Housing and Urban Development boosted conforming loan limits in higher-cost areas, such as Los Angeles and Orange counties, to as much as $729,750, until Dec. 31. The goal was to get more borrowers under the “conforming rate” umbrella and out purchasing homes.
The plan hasn’t elicited the anticipated enthusiasm.
“They’re a useless proposition by the government, a joke,” said Mark Cohen, owner of Cohen Financial Group in Beverly Hills, echoing a number of brokers. “I’ve done only one of those loans so far.”
The reason brokers and many borrowers are turned off by these so-called “jumbo conforming” loans -- between $417,000 and $729,750 -- is that they require a ream of documentation and high FICO scores, and they offer only 15- and 30-year fixed terms, currently at 6.625% with one point. No interest-payment-only loans are available.
The refinancing scene
For those refinancing, if appraisals show that the borrower’s property value has declined, reflecting too-little equity in the home, the borrower must come up with additional money. Many jumbo customers are choosing shorter-term mortgages that they can refinance in five or seven years (old-fashioned jumbos), because the rates are better. These are particularly popular for loans of $1 million and higher.
“The new conforming loans have limitations that don’t benefit all borrowers,” Soleymani said. “If [the government] really wants to help the public, it should induce investors who buy mortgages, which in turn will help reduce the rates.”
The borrowers for whom the new conforming rates make the most sense, brokers say, are those who got adjustable-rate mortgages in the $500,000 to $700,000 range in the last two years at about 7%. If their loan is $500,000, for example, they’ll save $248 per month on the new 30-year-fixed mortgage. Although it will take about two years for the refi savings to kick in, after paying closing costs of about $6,500, they’ll save a bundle over the long haul.
Another option that is gaining in popularity is a Federal Housing Administration loan, up to $729,750, more than double the old limit of $362,790. It will revert to that limit at the end of the year.
These loans, insured under a program administered by FHA, target low- to moderate-income home shoppers and are underwritten less stringently, allowing as little as a 3% down payment, but requiring a great deal of red tape.
There are different scenarios for every borrower, experts say, and each one must do the math to see whether the new options are worthwhile long-term. Keeping a cool head helps.
“Don’t panic,” broker Ohlbaum said. “There are lenders out there, and money is available. The requirements are just different. Everyone has to get used to that.”
--
