Wednesday, February 25, 2009

South Bay-Beach Cities:Buying or Refinancing...6 things you need to know

If you are thinking of buying a property or refinancing your South Bay-Beach Cities home there are 6 things you should know about the current financial market.

While almost everyone knows that lenders have tightened their rules about making loans; most people really don't quite understand what that means when they are shopping a loan for a purchase or a refinance. If the only real estate loans you have obtained have been within the last 7 years... you may be in for a shock.

The rules have changed drastically from a few years ago. The Beach Cities have seen conforming loan limits raised to $729,750 but these loans, known as conforming Jumbo loans, have a higher rate then loans under $417,000. If you want a jumbo loan (over $729,750) you will need a big down payment along with excellent FICO scores. You will also need to be patient as a number of lenders are not offering jumbo loans because they have to keep them as part of their in-house portfolio rather then sell them to Fannie and Freddie.

6 things you need to know if you want to refinance your current loan or would like to buy a property....

1. I have great credit.... maybe... maybe not... a lot has changed in the last year. So what is a good credit score today? Two years ago a good FICO was 700 or better. In today's world a 700 FICO will cost you money. I stole the chart below from Dan Green at The Mortgage Reports. If you check out the chart (Fannie & Freddie rate fees) you can see that a credit score under 740 is going to cost you upfront fees in addition to the points the lender wants. These fees are for conforming loans. If you are looking for a non-conforming loan (jumbo) the best rates are for those with FICOs of 780 or higher.

2. I have 20% down so no problem... on a conforming loan ( $729,750-) 20%-25% down and good credit (720 FICO+)will work ...usually. If you want to utilize an FHA loan then you can have as little as 3% down and a slightly lower FICO score but you will get a higher rate and pay some upfront fees. If you are looking for a loan over $729,750 then 20% and good credit isn't enough. You may find lenders wanting 30%-40% down with great credit (750+ FICO)and a good chunk of cash in reserve. The guys who 2 years ago would have tripped over themselves to throw money at you will now barely acknowledge you exist.

3. My income is 1099 based not W2 but I make lots of money... There has been a lot of talk about stated income loans... those loans were made for people who were not traditional W-2 employees. Today many lenders turn a blind eye and a deaf ear to 1099 employees. There are a few lenders making stated income loans with a large down, verification of assets and 2 years in the business. For the most part 1099 employees are out of the loop unless they have very large bank accounts.

4. But Interest rates have dropped... Rates have indeed dropped but the "great rates" are only for those with high FICO scores and large down payments. Conforming loans with 10% down or FHA's are not to be found for 5%. The big boys with large accounts can find some sweet deals on jumbo loans but most borrowers are going to need high FICO's and pay points to see those lower rates.

5. I can always get an adjustable...buyers got used to having a number of choices in the types/terms of adjustable loans. There are more choices for conforming loans but if you are seeking a jumbo loan you may find your choices limited to a 1/1 or a 5/1 term . A number of lenders are not making 7/1 or 10/1 loans as they are not sure where rates will go in the future. If you are thinking of interest only add at least another .25% or more to the rate.

6. I have 20% equity, so a refi should be a snap... Don't count on it. There are not many lenders who will even consider a loan-to-value even if you use the same lender . Some lenders are looking for 30%-40% equity on a refinance in markets they feel are trending downward. On a similar note lenders are not real crazy about cash out refinancing. There are some who have those programs but they are likely to cost more money.

In today's market the best way to ensure you get a loan is to do your homework. Don't assume that because you got a loan a few years ago without any issues that you can do the same today. If you are buying a home you need to be fully approved before making an offer and be ready to throw in additional cash if necessary. If you are refinancing, don't expect the process to be easy. Remember, banks are more apt to give loans to people with substantial resources... and cash in the bank can buy a lot of goodwill.


Anonymous said...

These 6 reasons are exactly why the beach cities are going to tank. The longer the banks make it this difficult, the worse it will be. That mountain of cash that the banks are looking for for a down payment is just not there anymore.

Kaye said...

Anon 10:37,
I suspect things will settle down a bit over time. There are a number of things banks could do to make it a bis easier to get a loan without resorting to the idiocy of the last few years.

Anonymous said...

Are you seeing any issues with a gifted down payment? Example, parents gifting 20%?
Thank you.

Kaye said...

Anon 12:31,
A gift for down payment is still OK. Some lenders want to see proof og where funds ... i.e. donor will have to show account where money was and will also want to see it deposited in the recipient's account.

Buyer will also probably have to show a certain amount of cash reserves in their bank account as proof they can make payments.