The way people are paying for homes has changed greatly too and that has affected the type of homes that are favored by buyers.  When mortgage money was widely available the fixer was popular: take a 80% conventional loan and then additional money, often up to or over 100% of the value of the home a second to reduce the cash-to-close of have money to make those sweat equity repairs or hire a contractor to do the work.  In July 2007, 85% of all home sales closed with conventional loans.  Thirteen percent closed with cash according to the report for Multnomah County I ran in RMLS Statistics.  There were no FHA loans and only 1% were VA.

Forward to today (actually June 2011).  Cash purchases jumped to 23%, conventional loans dropped to 50% and the typically low down (3% to start and now 3.5% down) FHA loans now makes up 21% of the payment methods for sales in Multnomah County.

The death of the high loan-to-value Home Equity Line of Credit has changed the profile of the homes we see selling.  Financing buyers (who still make up 75% of the market can’t take more cash to do project so the “done/finished” home makes more sense.  The cash buyer has two typical profiles: 1) buying the houses that can’t be financed and typically needs major work and 2) buyers, often retirees, downsizing into move-in ready homes.  Of course there are exceptions but these are the primary profiles we see.

The result is still the same: sellers need to look at what projects they need to complete before going on the market that will appeal to the buyers.  The buyer reaction has changed from “this will be perfect if we move this wall, gut this, and do that” to “this is too much work, let’s go.”  Sellers often don’t have the funds to do anything so picking the projects that get the most bang for the buck are really important.

Everyone is pretty much aware that your credit score is the initial loan qualifier for a mortgage.  A score of 740 qualifies you for the best rates and as it drops, your rates go up and then at a point you are cut off.  Debt-to-income is another factor.  You’ll supply your taxes and bank statements (and anything else they ask for).  Your mortgage broker will guide you through the process.

For one reason or another a pattern of bounced checks had not been flagged until the final review of the file.  Even though the buyer had been pre-approved through automated underwriting, a borderline debt-to-income ratio triggered a complete review of the file and moved it to manual underwriting. The underwriter said that the Not Sufficient Funds (NSF) checks were the deal killer.

In hindsight someone on the lending side might have caught this earlier but they didn’t so all we can do is learn and be reminded that even though NSF checks don’t hit your credit, they can torpedo your ability to get a mortgage.

Every scenario will be different but for this case we used a $300,000 purchase and assumed a 4.25% 30 year principle and interest loan.  Closing costs and other factors are not included.  We added a 6% interest rate column as well.

The first rule change is a reduction in the financed up-front mortgage insurance premium will drop from 2.25% to 1%. That’s a loan reduction of $3,618 in this example. The second change increases the monthly insurance to .09% of the current loan which results in an initial increase of $67 per month even after the principal reduction from the first change.  You must carry mortgage insurance until the loan to value (LTV) reaches 78%.  On average, that takes about 10 years.  Note: as the monthly insurance charge is based on that month’s loan principle the amounts of the one and five year comparisons are somewhat inflated as the monthly payments will drop slightly each month.  This simplified version does not factor that in.

The other affect of the rule change is a reduction in buying power.  Because of the higher monthly payment, the amount the buyer qualifies to borrow drops as well.  A buyer who is purchasing at their max price ($300,000 in this case) has their loan maximum drop  $13,600 which may prevent the purchase altogether.

Most of the changes will raise the cost of the loan and/or the out of pocket expense at closing.  Some can be wrapped into the loan, others must be paid:

1. Lowering the amount of closing costs a seller can pay.  Currently 6% of the sales price, that might drop to 3%.
2. An increase in mortgage insurance rates.  Mortgage insurance is a feature of most loans where the loan-to-value is lower than 20%.
3. Credit score minimums.  There have previously been no stated minimums by FHA, the banks themselves made the determination.  500 would be the new minimum (the gold standard is now 740 where it was once 720).  The lower the score the harder it is to qualify for lower down payments.  There would also be more emphasis on debt-to-income ratios and factors as well.  Banks have scrutinized FHA loans less than their own as losses are guaranteed by FHA.

At the same time, FHA is also working with existing homeowners with FHA loans and negative equity to refinance.  It is better for FHA to refinance than to take the home back on default.  The Short Refinance program will start accepting application on September 7th.

Assuming all other things being equal, the difference between a loan at 5% and a loan at 6% is 5.23% over seven years (the payment difference is $62.73/month/$100,ooo borrowed).  Why seven years?  That’s the average time of ownership of a home according to NAR.  That means in seven years on a $300,000 mortgage the 5% loan has saved over $15,000 in interest expense.

I used this Lendingtree calculator for my figures.

1. Reinstatement: Bring the loan current. This is recommended if your financial hardship was temporary. You will have to pay all missed payments, late fees, and legal fees that are due.
2. Forbearance: In the event that you cannot entirely pay your deficiency, you may be able to either negotiate a repayment plan with your lender, or add the balance to your principal. You may need the assistance of an attorney.
3. Refinance: If you have sufficient equity and income, and you still have healthy credit, you may consider refinancing.
4. Loan Modification: Some lenders may be willing to modify your loan by either lowering your interest rate or principal to keep your payments affordable. You may need the assistance of an attorney.
5. Rent the property: If your mortgage payments, Insurance, taxes, and other housing fees are less than what you could rent your property for, this is your last option to keep your home without having to sell it or lose it in a foreclosure.
6. Sell the Property: If you have sufficient equity, but your payments are higher than what you can afford, selling your property is certainly an option.
7. Short Sale: If you owe more than what your property is worth, and none of the above options apply to your situation, then this may be the best option available to you. There are many, make sure that you understand them. You may need the assistance of an attorney.
8. Deed in Lieu of Foreclosure: In effect, this is very similar to a’ short sale, but you will need the assistance of an attorney. Although, it does become complicated when there Is more than one lender Involved. Your lender may be more likely to approve a short sale than a deed in lieu because a deed in lieu places the property in their possession, whereas a short sale will get the property off of their books.

Not only is it important to discuss issues with your attorney, it is also necessary to discuss your financial situation or changes in your finances during a listing with your Realtor.  It may be an uncomfortable conversation but what might appear to be the best course of action may change and the process may change which could impact the sale.

All other things being equal, the change in payment between a loan at 4.75% and 5.25% is $91.62 per month on a $300,000 (30 year fixed) loan.  According to the Google Comparison this is what happens with interest rates as credit scores change:

• Excellent (740-850)- Lowest rate (not APR) of 14 lenders: 4.625%
• Very Good (700-739)- Lowest rate (not APR) of 14 lenders: 4.75%
• Good (660-699)- Lowest rate (not APR) of 14 lenders: 4.75%
• Fair (620-659)- Lowest rate (not APR) of 7 lenders: 4.75%
• Poor (580-619)- No lenders quote

THIS IS THE IMPORTANT PART:

Though it appears that your credit score doesn’t impact mortgages; it does:

• Excellent (740-850)- APR range of 14 lenders: 4.851% – 5.283%
• Very Good (700-739)- APR range) of 14 lenders: 4.964% – 5.295%
• Good (660-699)- APR range of 14 lenders: 5.184% – 5.721%
• Fair (620-659)- APR range) of 7 lenders: 5.198% – 5.621%
• Poor (580-619)- No lenders quote

All of the above comparisons are quoted from the Google Mortgage Comparison using $360,000 with 20% down in Oregon for 30 year fixed loans including FHA with up to 1 point in fees (by switching to 4 points, I can get a quoted rate as low as 4.25%).  The quoted rate is just that, a quoted rate.  The APR is designed to show the true cost of the loan with lender fees and origination points.  There are no brick-and-mortar banks that I recognize in any of the quotes and the banks listed are paying to be there, not a result of Google crawling for interest rates.

Just one more reason for buyer beware.

Conforming loans are those loan amounts under $417,000 while Jumbo loans are loan amounts over $417,000.  Rates on these two types of mortgage products used to be very close in rate.  This stopped about a year ago when only loans bought by Fannie/Freddie (backed by government) were the only “safe” bonds to purchase.  When this happened, your portfolio lenders – those buying up Jumbo loan products – had no one to buy their loans thus driving up the rate on any loan over $417,000.
Housing product listed over $417,000 has been dramatically dropped in price because the interest rates were much higher on this more expensive paper.  A conforming loan rate might be at 4.75% while the same borrower would have to pay 7-9% on a Jumbo loan.  This has driven many buyer’s away from the $450+K house price range.  We have seen competition in the lower price ranges pick up as of recently due to more expensive financing on any loan over conforming limits.

Jumbo rates are coming back!  There are lenders out there today who have recognized this problem and are now offering Jumbo rates at 5.5% (5.75APR) on a 30-year fixed.  These lenders have taken some of their government monies recently received to create a solution for those buyers and sellers affected by the high rates on Jumbo loans.  Now that rates on loans over $417,000 are starting to return and become more in line with those conforming loans, expect the inventory levels in the higher price ranges to shrink.

We’ve seen how dynamic the mortgage market has become.  What is available today may not be tomorrow.  The loans have high loan to value ratios (30% in Portland) so there is a considerable down payment requirement.  An FHA loan could require as little as 3.5%.  Will the banks offering these loans run out of money due to popularity or will other banks return to the market?   In many respects, the answer is vital to the real estate market.

On the other hand, one of our clients that he is working on the loan for got a lower rate than previously locked for free! Things have changed drastically in the mortgage market in the last few days. The refi market may suddenly reappear. Too little too late? Won’t matter, market is toast? Just what the doctor ordered?

Last night KOIN ran a story featuring Rob Levy who is in Prudential Northwest Properties’ West Portland office as well. I think Rob paints an accurate portrayal of our market.