When Bob Dylan wrote “The times, they are a-changing,” he probably wasn’t talking about home mortgages. But current trends are signaling a shift in the industry, back to mortgage basics.
Not unlike other industries, the mortgage industry is naturally cyclical. After the heated market of recent past, things have started to even out, much like the swing of a pendulum over time. Right now, it’s swinging back to the basics.
What this means for consumers is a change in mortgage products and guidelines this year, with an emphasis on traditional mortgage products, such as a fixed rate for 30 years. The more risky sub-prime market has virtually disappeared, and while variable rate mortgages are still available, demand for them has been greatly reduced.
The changes bode well for consumers, since traditional mortgages are safer and rates are relatively low at present. Mortgages are now focused on solid long-term fundamentals that are sustainable, limiting the risk for both the home buyer and lender. In effect, the mortgage industry is shifting back to a less-frenzied market reminiscent of five years ago, where pragmatism was more acceptable.
Today, lenders are tightening loan requirements. Those with spotty or little credit who would fall into the sub-prime category will find it harder to land a mortgage. The good news is that the Federal Housing Association (FHA), which insures loans with as little as a 3% investment, takes a more common sense approach to underwriting. While credit score is a factor, underwriters have the authority to manually review a buyer’s situation to see if it meets FHA’s guidelines. Underwriters can take into account borrower re-established credit history or alternative credit history for those with no credit scores. For example, borrowers may qualify for an FHA loan as little as 2 years after a discharge from bankruptcy. This change is helping push through more loans with a new, more simplified process. In addition, the federal government has kept interest rates at near historic lows, keeping the cost of mortgages down.
While the 80/20 loan combo is all but evaporated, there are still loans out there for borrowers with no down payment. Generally these borrowers must have good credit and employment history. There are even 100% loans with no PMI (private mortgage insurance) both on conventional loans and another popular program in our area, Rural Development. Rural Development loans are available in any parish considered rural, which in our area includes all of Ascension and Livingston parishes. Because of hurricanes Katrina and Rita, you can even do a Rural Development loan in East Baton Rouge Parish as long as the property is outside the city limits of Baton Rouge until 8/29/08.
One of the biggest changes in the market is the absence of investment buying. The housing boom of recent past was fueled by speculative buyers who sought to buy properties that would be then sold or flipped for a handsome profit. The leveling of home values and, in some areas, a drop in prices have made this activity less profitable, therefore practically eliminating it.
Instead, consumers are buying homes for the more basic reasons: because they need a good roof over their head. Home buyers are more interested in details such as the location, proximity to schools, and the right mix of bedrooms and bathrooms. Most important is that current home buyers expect the cost of monthly payments to be realistic for their financial situation and lifestyle.
In today’s changing environment, it is important to have a lender that can not only help borrowers decide which program best fits their needs but can also help counsel who can’t get a mortgage now on what steps to take so they can in the future.
In the end, it’s a good time to buy a home if you plan on staying put for more than two years and are moving for the more basic reasons: a new job, closer to school, a bigger family, etc.
What does this mean if you’re selling a home? Although the market isn’t yet balanced – the amount of sellers still out-numbers the buyers—there are buyers out there, just less of a frenzied rush to buy now. With hopes of inventories stabilizing in the near future, sellers have something to look forward to, for the times, they are a-changing.
By Leslie Lovett, Branch Manager with Market Street Mortgage in Baton Rouge
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