I have a guest columnist for this post. Steve Smith of Eagle Home Mortgage in Scottsdale, Arizona put together an informative overview on what is going on with the mortgage industry during these volatile times.
There has been much written of late regarding the general state of the mortgage industry. There is no simple answer to this, but let me tryAll Posts and explain some of what has been going on and where we see the industry heading in the near future. Most of what I will be talking about is loans that are at or below $417,000.
There is no question the mortgage industry has gone through and is still experiencing major changes over the way business was done in the past three years. For those of us who have been in the business longer than 10 years, it is really “back to basics”. What that means is we are back to the three “C’s” – Credit, Capacity and Collateral.
The Three “C’s”
Credit is self-explanatory in that you must have a demonstrated record of paying your bills on time with no derogatory credit. To get the best rate and terms, most lenders are looking for credit scores above 700. FHA loans are an exception to this and I will talk more about them later.
Capacity means the borrower can document their income is sufficient to not only maintain their current debts but also the new loan they are asking for. Down payment also falls into this category and has become more of an issue. With again the exception of FHA, most loans today require a minimum down payment of at least 5% and in most cases 10%. The borrower must show these funds are available along with sufficient reserves in case of some type of income interruption.
Collateral is the appraisal on the home they are purchasing. This really comes under tight scrutiny in a declining market such as the greater Phoenix area. We are seeing many lenders requiring either a second appraisal or a field review. Any type of discrepancy is often times resulting in a counteroffer for a lower loan amount.
Types of Loans Available
The vast majority of borrowers – well over 80% – can, and do, qualify for mortgages in today’s market. Contrary to what you read in the media, most borrowers do qualify and will have no problem getting a mortgage. The types of mortgages that have been discontinued or substantially revised are the more unusual type loans such as 100% financing, interest only adjustable rate mortgages (ARMs), and stated income loans. Any number of variations of these types of loans have caused so much trouble in the industry with borrowers defaulting when they are either unable to make the payments or realize the property is worth substantially less than what they paid for it.
One of the bright spots in the mortgage industry today is the FHA loan. Through the end of 2008, the maximum loan amount for Maricopa County has been increased to $346,500. This means that ANYONE purchasing a primary residence can apply for 97% financing on their home. Not only can you get a higher loan amount, FHA is more forgiving on credit scores. Any credit score above 620 gets the best rates and terms available under FHA rates. The 30-year fixed FHA is one of the best deals in the market today. For those of you unfamiliar with fixed loans, “30-year fixed” simply means the loan has a fixed monthly payment with a guaranteed rate and will pay off at the end of 30 years.
If you would like to contact Steve Smith from Eagle Home Mortgage to learn more about the mortgage industry and loan products, he can be reached at (888) 648-0783 orSSmith@eaglehomemortgage.com.