Rosedale RE Trends: Loan Considerations

Loan Considerations for Loan Amounts Between $200K - $417K

With all the doom and gloom publications that are mostly exaggerated, many potential borrowers believe that home mortgage lending options have dried up.  While underwriters and investors are scrutinizing files more closely, attractive rates and terms still exist for owner occupied purchasers seeking a conforming loan limit (under $417,000).  FHA and VA can still lend up to 100% LTV and conventional permits up to 97% LTV.  There are certain guidelines to meet when going to these high LTVs, but they are not impossible to surmount.

Every home buyer should first ask themselves what payment they feel comfortable in committing to on a monthly basis.  Too many buyers over-extended themselves in recent years on homes they simply could not afford, but qualified for on loose lending guidelines.   Just because you can qualify for a certain loan amount does not mean that it’s the best decision for you. 

Once the comfortable payment has been established, you can back solve for what loan amount will yield an amount close to that payment and search for homes in that price range.  You will need to take the amount of down payment into consideration, as well as whether a 30 year, 20 year or 15 year fixed option is best.  While adjustable rate mortgages (ARMs) are blamed for much of the current lending turmoil, a sophisticated borrower can determine if an ARM product makes more sense for their situation.

As of today, 30 year fixed rates are hovering right around 6% with no prepayment penalties.  But, it is important to keep in mind that if less than a 20% down payment is made on a home, there will be mortgage insurance.  Mortgage insurance protects lenders in case of default.  Loans above 80% LTV are considered greater risk, thus, carry mortgage insurance.  Borrowers can pay mortgage insurance separately per month or it can be built into the rate.  Mortgage insurance premiums will vary based on the LTV.  In recent years, second mortgages were popular to avoid mortgage insurance.  However, they are tougher to secure in this environment in light of the volume of second mortgage lenders that lost millions of dollars in defaulted loans.  Since they were in second lien position, their priority in being repaid was subordinate to first lien holders.  When homes were foreclosed upon, the second lien holders were typically paid back nothing.