In the madness of the mortgage business — the credit-crunch, the subprime-meltdown, the liquidity-crisis, etc . . . are things really falling apart in the mortgage-world? A lot of soon-to-be borrowers assume that the outlook on mortgages is a gloomy one, but is it really all that bad?
Well, it depends.
For the borrower with above-average credit (a credit score over 700) and at least 5% to put down as a downpayment, who is looking to finance $417,000 or less (the cutoff between a conforming Fannie Mae/Freddie Mac conforming loan and a non-conforming or jumbo loan), almost NOTHING has changed. For these credit-conscious, downpayment savers, you can breath easy, you can still get a great loan. In fact, you can still get a great rate on a great loan (this week’s rates even better than last week’s rates). You can still get a piggyback loan, or a combination-loan, or a 1st and 2nd mortgage, 80-15-5 or 80-10-10. And you can still get an interest-only loan, if you want one (although because of the current state of affairs, investors’ appetites for interest-only loans have minimized, causing these rates to actually be higher than a fixed rate mortgage).
Great credit, good downpayment + a good job history, document-able income + good collateral (value of home) = a good credit risk.
Seriously troubled-credit, no downpaymnet + little job history, no job history documentation, no-document-able income + good collateral = not a good credit risk.
In the past, investors were willing to take on the riskier loans in exchange for a higher return (and a higher rate to the consumer). Today, not so much. Check out my past posts on why the sub-prime mortgage market melted down.
Troubled credit, some downpayment (5% to 10% down) + hard to document income + good collateral = medium credit risk. Are investors still doing loans with medium credit risk? Absolutely.
Good credit, 20% downpayment + no documentation of income, assets, employment (a No Doc loan) + good collateral = medium credit risk. Are investors still doing these loans? Absolutely.
Crazy but true, the figurative teaching of the first day of mortgage school applies more so today than ever — much better than any computer-credit-score-loan-performance-predictor model. Ah, the good ‘ole 4 C’s of the mortgage underwriting process: capital (do they have funds for a downpayment and reserves to pay back the loan); credit (will they pay back the loan); capacity (can they pay back the loan) and collateral (what if they don’t pay back the loan). If you can pass the 4 C’s test (which at best, a sub-prime loan from 2006 might pass one of the four tests, more than likely only a-half of one of the tests), then everything is fine. Deep breath, breathe easy, for you, the sky is sunny and clear. . . for you, it was just an acorn.
Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC and writer for “the Mortgage Blog.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.