Turmoil in the mortgage market has created changes which will have profound effects on those wishing to purchase or refinance their homes.  These changes are occurring so quickly, I am typing this article with fast drying ink to insure accuracy. 

More than anytime in the last 10 years, qualifying standards and rates are now being determined by the 3 C’s of prudent lending standards: Character (credit score), Capacity (debt-to-income ratio) and Collateral (loan-to-value ratio). Here are some of the changes which have occurred since the sub-prime meltdown:

Sub-Prime Loans.  These are actually still available, but at interest rates considerably higher than the famous two-year teaser rates of sub-primes past.  Most of the larger lenders have dissolved their sub-prime divisions and do not offer loans for those with outstanding collections, liens, and low credit scores.  Lenders and brokers now know that the best solution for persons who fit into this category is to work with them in improving their credit to minimal FHA, VA and FNMA standards.

Stated-Income Loans.  These are still legal in Nevada if the lender uses “commercially reasonable means or mechanisms” in the approval process. Few lenders are now offering these products. Those that do charge a stiff rate premium.

Non-Income Non-Asset Loans: Gone. No one I have talked to knows where you can find one.

Jumbo Loans (home loans above $417,000 in Nevada).  These are now priced one to two percentage points higher than conventional (non Jumbo) rates.  Inexplicably, a $500,000 Jumbo loan at 33% loan-to-value is priced over one percentage point higher than a $417,000 non-jumbo loan at 95% loan-to-value.

High Loan-To-Value Conventional Loans:  Lenders have bumped their rates for these.  Fortunately, mortgage insurance rates have not increased, but that may soon change.

Low Credit Score FHA and VA Loans:  The lower your score, the higher your rate.  No more “one rate fits all” as was true with these loans in past decades.

40 Year Fixed Rate Loans:  Since rates on 40 year fixed rate loans are over one half percent higher than the rates on the 30 year fixed rate loans, why would anyone want this type of loan?  The payment differential between the 30 year and 40 year fixed rate loans on a $200,000 loan, for example, is only about $11.00 per month.

Option ARM’s:  This much maligned product allows borrowers to select a negative amortization option, and is now considered dangerous for unsophisticated borrowers.

FHA Loans:  FHA has just raised its limit in Washoe County to $403,750 for a single family home and Carson City is now at $398,750.  Because borrowers can be approved with low credit scores as long as the substance of their credit is acceptable (no outstanding collections, liens, or recent credit issues), these loans are fast replacing those of the sub-prime market.  In addition, FHA requires only 3% down, and accepts gifts from relatives or non-profit entities for down payment and closing costs assistance.

30 Year Fixed Rate FNMA Loans: With attractive low fixed rates available and the likelihood of higher rates on the horizon, these loans have now returned as the soup d’ jour.  Dad was right.

Hybrid Interest-Only ARMS:  With an initial fixed rate period of usually 3, 5 or 7 years, these loans are still popular for those who are planning to pay off their loan within the fixed rate period. Though rates on this product have bounced around a bit this last month thanks to the Bear Stearns issue, they are still attractively priced in the low to mid 5% range.

Investor Loans:  Since Stated Income Investor Loans represent a good chunk of current foreclosures, underwriters are tightening qualifying requirements and lenders are increasing rates on these loans. If you can’t put at least 30% down, you will not be pleased with your rate or your cash flow.  If any negative cash flow cannot be supported with your day job income, you will not qualify for the loan.

In summary, quality loans with low rates are still available.  Call me at 775-750-5626 if you need to discuss your particular loan situation.

Larry Johnston