Loading ...At the risk of stating the obvious, the current financial situation for banks and mortgage lenders is dicey is at best. Credit markets are tightening. Banks are so reluctant to lend money that many of them are not even lending money to other banks. The mortgage market is kind of like climbing Mt. Everest… the higher you go, the tougher it is. We’re all hoping the Federal government can figure this mess out and soon so we can get to the stabilization point. One thing is for sure, we live in interesting times.
In terms of mortgage rates, the good news is that the conforming loan market is doing pretty well. Conforming loans are loans up to $729,750 (recently raised this year from $417,000) that conform to Fannie Mae & Freddie Mac guidelines. We all know how well those guidelines worked out, but I digress. For loans in this category, rates are still very attractive, mostly in the 6% to 6.25% range with 0 pts. There are slight adjustments for your FICO score. Borrowers with gold credit (i.e. high FICO scores) get a better rate. And you can still get 90% loans in this category, so as long as your credit is good and the loan amount is under $729,750, it is still relatively easy to get financing if your credit and income is good.
There are low down payment loans available as well. FHA loans up to $729,750 are at slightly higher fixed rates (6.625% range today) with 0 pts, although there is a Mortgage Insurance premium of 1.25 to 1.5 pts. The benefit here is that you can put as little as 3% down, so for buyers without large down payments the FHA program is the way to go. The other benefit is that there is no minimum credit score, so borrowers with lower credit scores can still get a loan with a low down payment.
It’s the market for loans over $729,750 where the market is struggling. The reason is simple - there are not many buyers for jumbo loans, and so the buyers demand more return (a higher rate) to entice them to take the risk. Right now on loan amounts over the conforming $729,750 loan amount the fixed rates are in the 8% range. And the buyer has to put more money down, with lenders typically demanding at least 20% down on loans up to $1 million, and 25% or more down on loans over $1 million. And underwriting guidelines and required credit scores have tightened as well. Gee, it’s as if the lenders don’t event want to lend the money. Most borrowers today in the jumbo loan category are moving towards interest only product, which is much more attractive. Right now on jumbo loans you can get a 5/1 interest only ARM (Fixed for 5 years, then turns into an adjustable rate loan) or a 7/1 interest only ARM in the 6.5% range. This is obviously a much more attractive alternative to the fixed rates available for jumbo loans.
Another common strategy in the jumbo loan market is to package a fixed and an equity line loan to finance the property. Let’s say the borrower wants to borrow $1.2 million and put at least 30% down. The borrower can get a conforming $729,750 first loan at say 6%, and also get an equity line of credit at 4.5% (prime rate minus 1/2%) today for the additional amount to bring the total loan amount to $1.2 million. The blended rate in this case would be 5.41%. Of course the equity line is a variable rate loan, and will adjust with the prime rate. But if short term rates are likely to remain low, this is not a bad option.
Other changes in the mortgage industry include:
* The jumbo conforming max loan amount is currently $729,750. However, this is set to expire at the end of this year. The current betting is that it will drop down to $615,000, although nothing is finalized yet.
* Credit underwriting has tightened up significantly. Income ratios have dropped, meaning lenders will allow less debt for every dollar of income. And credit scores have become very important in your ability to get a loan, and what rate you will pay
* Lenders have been requiring higher down payments, especially for investor loans and jumbo loans. Higher down payments can mean lower interest rates.
* FHA minimum down payments are expected to rise from 3% to 3.5% at the end of the year.
Overall, with the Fed pumping millions of dollars into the banking system to stimulate lending, there should not be significant upward pressure on rates. But the key question, especially in the jumbo loan market, is when are investors going to start buying jumbo loans again? Until there are more buyers for jumbo loans in the secondary market, the rates will remain high and the market will be volatile.
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Mortgage Market - Jumbo Loans Still Playing Hard to Get