Home financing may never be the same again.
As much as I think I know about mortgage, it's been challenging to keep up with who still does what and which banks are still in business. Due to limited equity in homes and tightening loan qualification criteria, I can't be so confident anymore that I will be able to refinance my clients' loans when their fixed payments become adjustable. If you are one of the fortunate ones with some equity, I would highly suggest exploring your options now. Things are changing in this industry daily, and I believe you could benefit from what I've been able to gather from my direct lending experience. Knowing how this information may directly impact you, your homes, and your family will be important when it comes time to make a critical financing decision.
Refinancing will likely not reduce your payment, but quite the opposite. And this is a good thing.
In the past few years alone, lenders have introduced countless mortgage options from negative amortization loans to zero payment programs to 125% financing! As you know, this led to an incredible surge in home values driven by people's desire to leverage the lowest possible payment for the largest possible home they could "afford" -- which ultimately led to, the worst housing market the United States has seen since the Great Depression. Depreciating value is certainly something that us homeowners are not used to, and the limited loan programs available for people to refinance or buy homes of such reduced value reflect the banks' resistence to lend in this market. For example, equityline 2nd mortgages which once accounted for more than 25% of my business now constitute a whopping 0%, because most lenders no longer offer them. What this means to borrowers is that it may no longer be an option to split a loan into two in order to obtain a reduced rate. You may have once taken out an 80% 1st mortgage and up to the remaining 90% (or 100%) on an equityline 2nd. Today you'd have to take out only one loan, and if it's greater than 80% you'd also pay a monthly "PMI" insurance premium to protect the lender from default. On top of that, the mortgage insurance companies have been less likely to insure loans with limited equity, so although a lender might approve such a loan, they may not be able to fund it without a willing insurer. Don't get me wrong, if you can refinance into a 30yr fixed with PMI, it's still wiser than gambling on a short-term adjustable rate. The payment may be higher, but your payment is permanently certain.
So what are people to do if they owe more than 80% of what their home is worth and they cannot get a traditional bank loan?
Well that's where the Feds come into the picture. FHA (or Federal Housing Administration) will guarantee a bank up to 97.5% of a home's appraised value if borrowers can prove they can afford the monthly payments, even with troubled credit. Comparable to (but less than) a monthly PMI fee is an annual FHA insurance premium of .5% of the loan amount, which is paid monthly. And for a home purchase, a seller can assist in the downpayment and closing costs by contributing up to 6% as a seller credit to the buyer. *In this buyers' market, sellers are very willing to contribute money to cover buyers' closing costs. I know I've mentioned this before but FHA limits have been TEMPORARILIY increased this year along with conforming limits, so people now have a short opportunity to buy beautiful homes at reduced rates with very minimal down. There has been debate in extending these limits beyond 2008, but nothing official has been declared yet.
Sadly in real estate, one person's loss is truly another person's gain, and for first-time buyers there are so many reasons not to wait any longer. At some point in the future, when existing homeowners finally break even on their home investments, recent buyers will have gained sizeable equity. Furthermore, there are several bills now in congress to assist our ailing housing market, including greater incentives for buyers of foreclosed homes and solutions for 100,000+ homeowners who now owe more than their homes are worth. Due to limited equity in people's homes, FHA loans now account for more than 35% of my transaction volume. FYI, FHA rates are unbeatable.
VA (Veteran's Administration) loans are even more attractive, where borrowers can finance up to 100% WITH NO PMI. *In general, VA loans are more restricted to homes at or less than $417,000 because VA will only guarantee 25% of this maximum loan amount to the bank, so purchases higher than $417k will typically require cash to pay down the difference (but there are exceptions for higher cost areas). This would explain why VA loans do not require mortgage insurance, because the bank essentially risks only 75%. And of course, you must be a veteran or an active reserve to qualify. However, because FHA/VA do invlove higher closing costs, I would encourage looking at traditional loan options first (*although an FHA or VA loan might be lower in rate). The simplest way to describe traditional loans in 2008 is to group them into categories based on loan amount. For purposes of this memo, I'll detail loan present loan limits for Santa Clara County: *Click here to view conforming limits in your area.
- $0-$417,000 are called "conforming"
- $417,000-$729,000 are now known as "jumbo conforming" because the increase to the traditional conforming limit is only temporary
- $729,001 and up is the new "jumbo"
- from my experience, "super jumbo" loans greater than $1MM are extremely challenging to obtain as sufficient equity, income and assets must be proven for a bank/investor to be willing to lend.
For simplicity sake, as you go up the tiers from traditional conforming to super jumbo loans, interest rates become dramatically higher. If borrowers can qualify for one of these loans, they have more options in terms such as choosing interest only or shorter fixed rates. Although many options still exist for traditional loans, I would encourage borrowers to lock a 30yr fixed even though a principal and interest payment can be much higher. For the majority of lenders "stated income" loans, where you show no income documentation, are becoming more and more scarce -but they are still out there. Lenders are now more concerned about your ability to payoff the loan over the long haul, as they can no longer count on sufficient collateral to cover their risk. Unfortunately in the short term, many people will suffer from downward spiraling home values and ballooning loan payments. But there is a bright side. Once adjustable loans inevitably expire and this wave of foreclosures finally calms down, I think it's safe to say that we can all look forward to a stable real estate market, where people can truly afford their homes.
Thank you for taking the time to read my mortgage update. Please feel free to send me an email or give me a call to discuss if any of these options might make sense for you. Unfortunately for many of us no equity means no refinance, so I also offer services in Loss Mitigation, where it may be necessary to negotiate directly with your lender if there really is no other option. All information shared will be kept strictly confidential.
by Randy Miguel | Serving all of California
Associate Broker, Equitas Capital
FHA/VA Specialist, Morgan Financial
408.216.7274
About Me
Randy Miguel grew up in the Bay Area and attended Bellarmine College Preparatory in San Jose, California. From there, he went on to Santa Clara University where he earned a Bachelor's Degree in Finance. In 2004, Mr. Miguel established RefiWise, Inc. which later became known as WIRE Financial, a full service mortgage firm located in Santana Row of San Jose. In 2007, he and his family relocated back to their home near Sacramento, CA. Now as an active associate broker of Equitas Capital, he offers 12 years of banking and consultative loan experience to a diverse client portfolio, offering private "hard-money" financing to top tier A-paper loans. Additionally, Randy offers services in loss mitigation and direct lender negotiation in situations where refinancing is not an option. In such an uncertain economy, he commits to educating home buyers on the inherent risks of adjustable vs. fixed rates. Mr. Miguel prides himself in making sense of the fine print, so his clients can make the most informed decision about their home financing.
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