Changes, Challenges, and Opportunities

2009's Mortgage Environment - Changes, Challenges, and Opportunities

Some of the issues I've come across in the first two months of 2009 relative to obtaining mortgages:

1. 80% of the loans I am currently originating are FHA loans.

2. Soon, you will likely need a 620 credit score to qualify for a mortgage, including FHA. (Note: many lenders have already implemented the 620 minimum credit score.

Also, underwriters are becoming more and more subjective when it comes to interpreting guidelines and manually reviewing credit. Expect underwriters to ask for documentation they wouldn't have before, perhaps delayed underwriting decisions, and sometimes a bumpy road to closing. With that said, originators and processors are still adjusting to what the underwriters are requiring and we will be able to help our clients manage the process better over time.

3. 70% of my new clients are first time home buyers - the $8,000 FTHB tax credit is certainly helping generate new homeowners.

4. Refinancing can be very challenging in this market; mostly because of appraisal concerns. Even in Alabama, where we lead the country in home appreciation in 2008, we are seeing it difficult to get appraisal values where consumers need them in order to refinance.

5. It is very difficult to predict what mortgage rates are going to do day-to-day, week-to-week, or month-to-month. In years past, it was easier to predict the range in which rates would move based on technical factors, inflation, etc.

6. PMI companies have gone crazy. Any loan with a debt to income ratio over 45% is being turned down by the PMI companies. If you have a 780 credit score and 83% LTV, but a 48% debt to income ratio, you probably can not obtain PMI on your conventional loan. If your debt ratio is under 45% and you qualify for PMI on your conventional loan, your annual rate may be more tan 1.0% of the loan amount.

7. Many state housing finance authority programs are still jam-packed with tools to help consumers. For example, The Alabama Housing Finance Authority's Step Up program is still the best thing going in my opinion. They still have down payment assistance for FHA loans (3% of the sales price; FHA requires 3.5% down), their rates are good (currently 5.5%), you do not have to be a first time home buyer to qualify, and your total household income must be under $97,000.

8. It is still my opinion that first time home buyers should put as little down as possible, unless they have access to lots of money. My reasoning: the MOST important factor in creating financial security is the accumulation of a reserve savings account. If a buyer uses all of their available money for a down payment and leaves nothing back for reserves, what's going to happen if they lose their job? Don't spend your reserves on a down payment if you don't have to. If you do put something down, only do so if you will have enough money in reserves to last several months of payments. To put things in perspective, a 3.5% down payment ($3,500) will only save a borrower about $25 per month on a $100,000 loan. On the other hand, the $3,500 would be enough to make a consumer's mortgage payments for nearly 6 months!

9. I believe the $8,000 tax credit is great for first time buyers because it allows them to pay off debts, accumulate savings reserves, and eliminates the need to use credit cards to buy furniture, home furnishings, and yard supplies after closing. This simply means, if managed correctly, the first time home buyer can live in their new home with a peace of mind that they will be able to afford and sustain their lifestyle.

10. Don't become paralyzed by the news. Understand what is going on, but don't see things worse than they are. Only be concerned with the things you can control, prepare for risks, but don't worry about the things in which you have no control. Also, now is the time to ACT on opportunities that will not be available forever. America will recover and will be better off in the future. There will likely be no other time in our lifetimes where we will see opportunities presented as we have right now. Relative to housing, we have lots of good inventory to choose from, home values that have come down (can you say "on sale?"), sellers that are willing to work with reasonable buyers, tax incentives for first-time buyers, and rates that are within 1/2% of the all time lows.