Buying a Home and the Credit Crunch
By Brandan C Hadlock
Mortgage Servicing Pie
The acute losses suffered by Wall Street firms, Government Sponsored Enterprises (GSE's), and other investors across America led to credit tightening and the vanishing of the loan products that caused these losses. The principal culprits were the high-risk, 100% CLTV (combined loan to value) second mortgages on investment properties, most of which were transacted with Stated Income and Stated Income Stated Asset (SISA) documentation. This type of loan began disappearing two to two and a half years ago with credit tightening or discontinuance occurring quickly. Other high-risk loan categories that wrecked havoc were the Owner Occupied SISA and No Doc loans. These loans are no longer available from most lenders.
The fight to correct the predicament of high losses was so severe that maximum loan-to-value (LTV) percentages were reduced for conforming full-documentation loans for properties in declining markets (geographic areas where home values have decreased). The reduction was intended to decrease default rates and is being lifted this summer (up to 95% LTV) under certain circumstances.
During the first half of 2008, conventional/conforming loans (non-governmental loans equal to or under $417,000) and FHA loans have been popular. Borrowers with low credit scores have the possibility of qualifying with both types of loans, although the FHA loans may be capped at a minimum of 580 FICO score. FHA loans allow a slightly higher loan-to-value ratio (lower down payment) than the conventional loans.
The following are three new and temporary loan programs:
FHASecure - a FHA refinance mortgage available to homeowners currently tied to a non-FHA adjustable rate mortgage (ARM). Although originally meant for borrowers who had defaulted, or would likely default on their ARM, due to the rate changing, it was later opened to a wider demographic.
FHA High Balance - HUD (the U.S. Department of Housing and Urban Development) has established limits for its FHA-insured loans that vary by county. It has temporarily increased the allowable size of the loans that it insures. These higher balance loans may actually have better rates than smaller FHA loans.
Agency Jumbos - (also known as Conforming Jumbos). Jumbo loans are usually those that are greater than $417,000. Loans equal to or smaller than this amount are considered "Conforming" loans and have guidelines different than Jumbo loans that must be met in order to qualify. Through the rest of 2008, loans up to $729,750 qualify under the regular Fannie Mae and Freddie Mac conforming loan guidelines with the addition of some underwriting restrictions. The actual maximum loan amount depends on the county limits established by HUD and is valid only for 1-unit purchases (i.e., the maximum does not apply to duplexes).
You can view HUD's county limits at: https://entp.hud.gov/idapp/html/hicostlook.cfm
If you're buying a home and need a Jumbo Loan or High Balance FHA mortgage, visit Direct Mortgage.
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