Mortgage options in a post-subprime world

 
 
  • Paul Lueken

    Paul Lueken

Published: 1/11/2008 12:26 AM

What mortgage opportunities will you find when you want to buy a house in this post-subprime world?

Regardless of fears and stories you may have heard about tight credit, mortgages are available.

In fact, interest rates are low -- 5ˆ percent for a 30-year fixed-rate mortgage, said Paul Lueken, president of the Illinois Association of Mortgage Professionals.

Riskier loans that did not make sense according to traditional underwriting standards are gone or have become very rare.

These include subprime mortgages designed for borrowers with bad credit that require little equity or down payment and little or no proof of income. Rates for these loans often escalate over the years.

Now 30-year fixed loans are popular again, credit scores are important and FHA mortgages are a choice for those who don't have large down payments.

Adjustable rate mortgages are less popular these days because rates are not much lower than 30-year fixed rate mortgages.

Experts recommend shopping around for rates and meeting with a mortgage representative to examine what options are available.

Remember, besides a down payment, with most mortgages there are $1,500 to $3,000 in closing costs and a few months of payments in savings required as a reserve.

FHA

If you are a first-time buyer, consider an FHA mortgage, said Frank May, senior loan consultant with Green Valley Mortgage in Bloomingdale.

May said such loans are good for borrowers in the 620 to 680 credit score range, which would require higher fees or interest rates with conventional mortgages. Some FHA borrowers can have credit scores as low as the high 500s.

The very best credit scores are above 800, May said.

FHA (or VA loans if you are a veteran) have advantages:

• A borrower can pay as little as 3 percent for a down payment, which can come from either the buyer or as a gift from a relative. Closing costs are additional but can be paid by the seller.

• Generally, FHA borrowers should have housing expenses at or less than 29 percent of gross income and minimum payments for all debt at 41 percent. However, these numbers are flexible, and the FHA Web site, www.fha.gov, urges home buyers to consult with a mortgage professional.

However, such loans also have drawbacks:

• A mortgage must be $275,200 or lower. The median price for homes in the Chicago area in November was $247,000, according to the Illinois Association of Realtors.

There is talk of Congress raising the limit and lowering the cash requirement.

• If you have a down payment in the 20 percent range, you might want to get a conventional mortgage because mortgage insurance is still required with FHA loans.

Freddie and Fannie

So-called conventional loans sold to Freddie Mac and Fannie Mae are the backbone of American mortgages.

With such a loan, a mortgage cannot be more than $417,000.

If your credit score is good -- but between 620 and 680 -- you will pay a slightly higher interest rate and closing costs will be increased by hundreds or a few thousand dollars, May said.

A 30 percent down payment would negate less-than-perfect credit.

Borrowers also pay more if the down payment is less than 20 percent, but it can be as low as 5 percent, May said.

A conventional borrower should keep housing expenses within 33 percent of gross income and all debt within 38 percent. These guidelines are flexible depending on circumstances like great credit, assets, family size and expenses, or expectations of increased income.

Jumbo

What if you can afford a more expensive home -- say one with a mortgage higher than $417,000?

You will need to have good credit and a down payment of at least 10 percent, but 20 percent is better, said Lueken, who is also president of 1st Advantage Mortgage in Lombard.

A credit rating should be 680 or higher, May said.

Such a loan also will cost more. The interest rate will be about a half-percentage point higher than a conforming mortgage, he said.

This is one area where second mortgages can be allowed, said Paul Diamond, executive vice president for sales at Flagstar Bank in Gurnee.

His company did a loan for a buyer in Chicago's Trump Tower for which the person got a conventional loan, and a second mortgage for part of the amount above the conventional limit.

Credit dings

Then there are those people who are going to find it very difficult to get a mortgage. Experts recommend their best choice is to work for a year or so to fix their credit rating.

Nonprofit agencies like the DuPage Homeownership Center in Wheaton offer advice on how to do this.

Subprime mortgages for people with bad credit have become scarce.

Etc.

It is difficult for people who have not established credit or cannot produce tax returns that reflect all their income to obtain mortgages.

Self-employed people can still get what are called stated-income mortgages without providing all their tax information, May said.

Good credit is essential, and the rates might be a quarter- to a half-percentage point higher than with conventional mortgages.

People who fall below loan guidelines for homeownership still have some options.

For example, through its House America program, Countrywide offers ways to count extra income and help people with higher-than-average housing expenses or debt.

Counties and other local governments also have programs to help low-income buyers.

Some of the now-disappearing loans for people without income they can document made sense, Lueken said.

For example, someone with a large down payment and cash in the bank but no current income, which can happen in divorces, could be a good risk, he said.

The mortgage association is trying to change Illinois laws that eliminate all loans for which borrowers do not have to prove their income.

Because of new state laws starting July 1, FHA borrowers will not be able to take advantage of easier methods to refinance into a lower rate, he said.