Buying a Home and the Credit Crunch
The mortgage crisis has caused credit tightening, which in turn can make buying a home more difficult. This article explains some of the effects of the credit crunch including the disappearance and temporary appearance of some loans.
The serious losses suffered by Government Sponsored Enterprises (GSE’s), Wall Street firms, and other investors across the United States brought about credit tightening and the disappearance of the loan products that caused these losses. The leading culprit was the high-risk, 100% CLTV 2nd mortgages on investment properties, most of which were executed with Stated Income and Stated Income Stated Asset (SISA) documentation. This loan type started disappearing two to two and a half years ago with credit tightening or discontinuance happening rapidly. Other high-risk loan types that resulted in significant damage were the Owner Occupied SISA and No Doc loans. Most lenders no longer offer these loans.
The fight to correct the predicament of high losses was so severe that maximum loan-to-value (LTV) percentages were reduced for conforming full-documentation loans for properties in declining markets (geographic areas where home values have decreased). The reduction was intended to decrease default rates and is being lifted this summer under certain circumstances.
Conventional/conforming loans (non-governmental loans equal to or less than $417,000) and FHA-insured loans have been popular during the first six months of this year (2008). Borrowers with poor credit have the prospect of qualifying with both types of loans, although the FHA-insured mortgages may limited to a minimum credit score of 580. FHA mortgages permit a slightly higher loan-to-value ratio (lower down payment) than conventional mortgages.
The following are three new and temporary loan programs:
FHASecure – a FHA refinance mortgage available to homeowners currently tied to a non-FHA adjustable rate mortgage (ARM). Although originally meant for borrowers who had defaulted, or would likely default on their ARM, due to the rate changing, it was later opened to a wider demographic.
FHA High Balance – The regular maximum loan amounts for FHA-insured mortgages was temporarily increased by HUD (the U.S. Department of Housing and Urban Development). The maximum loan limits depend on the county in which the home is located. The higher balance FHA loans can have better rates than loans that fall within the regular FHA loan limits.
Agency Jumbos – (also known as Conforming Jumbos). Jumbo loans are usually those that are greater than $417,000. Loans equal to or smaller than this amount are considered “Conforming” loans and have guidelines different than Jumbo loans that must be met in order to qualify. Through the rest of 2008, loans up to $729,750 qualify under the regular Fannie Mae and Freddie Mac conforming loan guidelines with the addition of some underwriting restrictions. The actual maximum loan amount depends on the county limits established by HUD and is valid only for 1-unit purchases (i.e., the maximum does not apply to duplexes).
You can view HUD’s county limits at: https://entp.hud.gov/idapp/html/hicostlook.cfm
Filed under: Business