Getting a home loan—the good, bad and ugly

Are you thinking of buying a home in Portland? It’s July, 2010. We’re now three years into our recession/depression/darn grim real estate market.  This little update will keep you informed about the current climate for home mortgages if you are buying a home in Portland. Keep checking back here. This topic changes all the time.

FIRST THE GOOD NEWS FOR HOME BUYERS

Interest rates are the lowest they have been since the 1950′s!  Home buyers take note: I know of several people who have locked in a spectacular rate of 4.375% for the next thirty years.

Locking in a rate this low makes better financial sense than waiting a few months for a lower purchase price but having higher interest rates. Even if home prices continue to slide a bit lower, as a home buyer you’ll still do better taking advantage of these great rates. But that’s another blog topic.

THE NOT GOOD NEWS–WILL YOU QUALIFY FOR A HOME LOAN?

1.  GOVERNMENT GUIDELINES ARE NOW VERY TIGHT

Background: Today 95% of all home buyers use government insured loans through FHA, Fannie Mae and Freddie Mac’s rigid guidelines. Lenders must follow these guidelines to sell newly made loans on the secondary market. This frees up money for lenders to make new loans. These guidelines continue to get tighter and tighter.

Here’s one example: Lenders are now running a second credit report on buyers 3 days before closing.

TIP: Wait until AFTER closing on your new home to buy a new refrigerator or furniture for that new family room. Buying large items on credit before your home closes could mean the loan (and the house) will not close. Increased borrowing may push your debt ratio out of the government guidelines.

2. CHANGES TO FHA REQUIREMENTS

At this time 25%-35% of home buyers use FHA. And stimulating home ownership stimulates the economy. So would you think that FHA would make it easier for buyers to use FHA loans? Nope.

REDUCTIONS TO SELLER PAID CLOSING COSTS FOR BUYERS: Home buyers will get less help from sellers on closing costs. Sellers have been allowed to help their home buyers by paying up to 6% of buyer closing costs. Early this summer FHA will cut that contribution to 3% of the loan amount. On a $200,000 loan, the additional $6000 a buyer will have to come up with may mean the difference between being a home owner and remaining a renter.

INCREASES TO MORTGAGE INSURANCE PREMIUM (MIP): This is not the “If I die the mortgage is paid off” kind of insurance. It insures the lender for losses if the buyer is unable to make loan payments. (Do you think mortgage insurance companies have seen their claims go up the last few years?) Each month the borrower pays MIP as part of their monthly mortgage payment. MIP for FHA loans has traditionally been .55% of the loan amount paid each month for about 5 years into the loan. There is a bill in Congress now to raise that rate to .9%. This will raise the monthly payment enough to keep many borrowers from qualifying for a loan.

3.  QUALIFYING CONDO FINANCING:

The percent of condo buyers using FHA loans is probably much higher than for detached homes. FHA has scrapped its previous list of approved condo associations (condo buildings it will loan on). Now each condo association must start a new approval process before any more FHA loans can be used.

Learn more about buying a condo here.