Mortgage companies have changed the face of home loan lending as we come to the end of 2007. Here’s a look at the emerging landscape:
What’s Out
- 100% Financing: Banks have mostly stopped entertaining home loans where borrower makes no down payment. Earlier this year the California Association of Realtors said 41% of first-time California buyers were getting 100% financing. Now, in the fourth quarter of 2007, lenders won’t make loans without at the very least 5% down, and more likely will require 10% and 15% down payments.
- Adjustable rate mortgages offering 4 payment options: These loans, called Option ARMs, are risky because mot people make the absolute minimum payment. At a specified point after 30 months the loan payment can jumb by hundreds of dollars per month. In 2006, 27% of borrowers buying or refinancing houses in Santa Clara County used this loan.
- Interest only loans: The only way you can get them now is by showing you can pay not only the interest but the full principal and interest load when it becomes due later. Last year an estimated 28% of borrowers in Northern California used these loans to buy and refinance houses.
- Subprime 2/28 loans: Nearly all the biggest subprime mortgage lenders have stopped making these loans. The 2/28 offers low “teaser” interest rates for the first two years, and then resets to higher floating rates that can add hundreds, and many times thousands, of dollars to a monthly payment. Last year 80% of subprime loans nationally were 2/28s. They were typically made to people with weak credit histories. In 2006, 22% of home purchases in Northern California were with subprime loans.
- Stated income loans: Lenders have almost entirely stopped giving money to people who simply “state” their income on a mortgage application.
What’s In
- 30-Year Fixed Rate Loan: The traditional workhorse loan with its unchanging monthly payment across three decades is back.
- Mom & Dad: Parents are offering gifts to their children to reach a down payment of at least 5% (often from the equity in the parent’s home). Parents are making sure their children get a fixed-rate loan, too.
- Saving money and renting for another year or two: It’s old fashioned, but real estate agents say building up savings can be the ticket to buying a house.
- Income verification: Lenders now want to know all the specific details of borrowers’ financial situation. This means knowing their exact salary and other sources of income.
- High credit score: Lenders say a credit score of 700 or higher – and a down payment – will help deliver a mortgage to borrowers who intend to live in the house.
