It’s Harder Than Ever to Get a Mortgage and It’s Only Going to Get Worse
It’s becoming clear that one of the largest casualties to the collapse of the housing bubble has been easy access to mortgages. A number of changes to lending procedures has and will be restricting the ability for new borrowers to qualify for a mortgage. For the generation of young adults now saddled with personal loans for bad credit and unemployment, being unable to get loans to buy a home might be the next shoe to drop.
Higher Credit Scores
Think your average credit score will be enough for a mortgage? Ever since the housing bubble burst, banks have been raising credit score requirements. Most banks require a FICO score of over 600 for an FHA loan. Over the years, the largest banks have increased its minimums as high as 640. The higher standards have cut out an additional 15% of borrowers who would otherwise qualify for an FHA loan.
Restrictions on Seller Concessions
While commercial banks are looking for higher credit scores, the government has been changing policies that also curtail new lending. A few years ago HUD dramatically reduce the maximum amount of allowable seller concessions for FHA loans from 6% down to 3% of the property’s assessed value.
It may not sound like much, but this restriction has a huge impact on those looking to buy a home. Seller concessions are commonly used to help finance a home buyer. For example, prospective buyers can use seller concessions to help pay closing costs, down payments and escrow as part of the sale agreement. This helps cash poor home buyers overcome the large upfront costs. These new restrictions translated into thousands in lost funding to potential homeowners in areas where housing prices are high.
20% Down Payment or Else
The new Consumer Bureau, set up by Frank-Dodd, is eying ways to make mortgages more restrictive. One option for consideration is setting a 20% down payment requirement. Any borrower looking to forward a smaller chunk of cash would face higher fees as a deterrent. Since closing costs are already a large obstacle to many potential home buyers, any increase could price consumers out of the market.
Increasing Mortgage Rates
Who can complain about mortgage rates today? They are at record lows and rates have been suppressed for nearly a decade. It only means one thing; they are about to go up. It’s hard to say when, but there are a number of economic variables that are signaling that a shift to higher rates is at our doorstep.
The first indicator being that inflation has been making a comeback over last year. Energy, food and clothing are all leading the way to a needed interest rate cool down.
The other variable would be public debt. While Treasury bonds have remained stable regardless of looming US public debt and economic turmoil, it could be a temporary anomaly. As public debt crisis spreads across Europe there is nothing preventing a potential run here in the US. Although, I think it’s safe to say government debt won’t have much of an impact in the short-run.
New Financial Regulations May Lead to Your Mortgage Getting Sold
The new Consumer Financial Protection Bureau just released new rules demanding changes in how delinquent mortgages are serviced by banks. Rules include dedicated representatives for mortgagees who are facing foreclosure and collection stays on accounts seeking loan modifications.
Hopefully, this is going to mean better service for troubled mortgages, but it could have lasting ramifications for all mortgagees. Unfortunately, as regulations tighten, costs rise and industry professionals are predicting that banks may look to sell mortgages to specialty servicing companies. There are benefits for both banks and borrowers, but there are also a number of concerns that could greatly affect your finances for years to come.
You Lose Control of Who Services Your Mortgage
When your bank services your mortgage, you have an opportunity to look into your lender’s servicing practices. If you hear bad things in the news about how Bank of America mistreats borrowers, you know to stay away. This isn’t an option if your bank sells your loan to an outside company.
It begs the question: what if you don’t like the servicer? At least before, you could take some of the blame for picking a potentially lousy servicer. If mortgages are sold off to third parties, you are at the mercy of the company who places the highest bid. Even if you were to refinance, there is no guarantee that your next bank won’t sell your loan to the same servicer.
May Actually Make Predatory Lending More Prevalent
Remember how predatory lending played a role in the housing crisis? Well, creating a lending industry where those that originate a loan simply offload their obligations is likely to increase these types of practices. If the mortgage industry plans to simply cut the cord when collection gets tough, there isn’t a large degree of incentive to ensure that loans continue to be profitable into the servicing stage of a mortgage.
It might be all smiles when getting the loan, but wait until you see the company that is going to try and collect your mortgage payments.
In the short term, banks are looking to mainly sell mortgages that are already delinquent. Most mortgagees may never face the prospects of being sold to a servicing company. The good news is that not all banks sell their mortgages. It might be a question worth asking before signing on the dotted line.
Benefits of an Adjustable Rate Mortgage
Adjustable rate mortgages are loans that offer the buyer low interest rates for some set period of time, such as five years. These rates will fluctuate depending on the prevailing market interest rate.
Of course, this means that the interest rates rise or fall depending on the market situation.
This fact is especially important when you are living in a crumbling economy like that of the United States with hardly any national income growth these days.
These are the basic features of adjustable rate mortgages:
Initial interest rate– this is the beginning interest rate; usually low.
Index rate– this is the base on which the mortgage is based 1-year, 2-year and 5-year treasury securities are common.
Adjustment period– this is the length of time that the interest rate on the ARM is set to remain unchanged; normally reset at the end of this period.
Interest rate caps– these are limits on how much interest rates or monthly repayments can be changed by the end of the adjustment period or the loan lifetime.
Margin– these are percentage points that the lenders add to the index rate given in order to determine the interest rate of the adjustable rate mortgage.
Negative amortization– this basically means that the mortgage balance is increasing gradually. This arises when the monthly mortgage payments are not large enough to pay the interest amount due on the mortgage in full at once.
Initial discounts– a super-benefit of ARM’s are the initial discounts. These are interest rate concessions normally given in the first year of the ARM or other subsequent years to reduce the overall interest below the prevailing rate.
Prepayments– these may arise where the agreement requires the buyer to pay some special fees or a penalty in case the ARM is paid off too early. These terms are negotiable in most cases.
Conversion– in some cases, the agreement may allow the buyer to convert the ARM into a fixed rate mortgage. This can be quite essential in times when the prevailing market rate is fluctuating abnormally.
Most people pocket some pretty dollars in the housing boom if they have ARM agreements. This happens because they took the mortgages when the interest rate was low and they can therefore sell these houses when the interest rates are high.
You shouldn’t plan to stay in the same house for the long term if at all you want to enjoy the benefits associated with ARMs.
A great benefit enjoyed with adjustable mortgage rates is the fact that there is no need to refinance the loan in case the interest rates are dropping. The overall payment and monthly interest rates instead drop at the scheduled evaluation rate thus adjusting to the market condition. This is not the same case with fixed rate mortgages where one must refinance the mortgage in order for the rates to drop.
Since adjustable rate mortgages’ interest rates are usually lower than those of fixed exchange rates; owing to the discounts offered, the borrower can comfortably afford the risk of a future increase in the rates. We can, therefore, say that the buyer of an ARM ends up saving some money due to the lower interest rate paid initially.
Recently, an observation of the current crisis in America has laid the blame on ARMs for the housing crisis being faced. However, this is not the case because there are several other thousands of mortgagors who are enjoying great benefits attributed to ARMs. It all depends on the choices that one makes. If you are looking to buy a house as property investment, this might be a great option. It is also important to be on look out to know when the interest rates have began to rise so that you can sell the house and earn some profit.
Getting Serious About Paying Off Your Mortgage
For most people, paying off a mortgage is not really a priority. Given the typical timeline of 20-30 years, it’s really hard to get excited at how big a dent an extra couple thousand dollars will make.
Combined with the fact that most of us will sell that home long before we own it outright, it just always seems like any extra money you have could be better used somewhere else.
Obviously if you’re struggling with your current finances, the idea of ‘finding’ thousands of extra dollars might be a bit laughable. If, however, your family is making anywhere over, say, $60,000 a year (obviously depending on where you live and how much your home cost), you really do have some exciting options available.
What would life be like without a mortgage? Would you be able to travel more? Work less? Have one parent stay home with the kids? Rent it out and live abroad somewhere?
What if you make paying your mortgage off a real priority in your life? What if you bought cheaper cars or took staycations instead of flying around the world? What if you took a second job, negotiated a raise at your current one, or started a home-business to work on on the side instead of wasting time in front of the TV? What if you threw every bonus and tax refund towards your mortgage?
What if, by this time next year, you’d done some or all of these things, and now, between money you were no longer spending and extra money you were earning, your family had an extra $20,000 to $40,000 a year to put towards your mortgage?
How long would it take to pay down your home compared to what it is now?
Using Low Interest Rates To Speed Things Up
If you are locked in to a high interest rate on your mortgage, you should really think about refinancing. A quick search of ‘mortgage rates Canada’ will give you a good idea of just how low rates can be. If you DO decide to get aggressive with your payments, the more you can pay down at the beginning, the more you’ll save in interest in the long run. Refinancing to that lower rate can greatly speed up the effectiveness of lump-sum payments as you get crazy with your mortgage.
Not For Everyone
Being this kind of aggressive with your mortgage isn’t easy. It requires a very long-term outlook, and you’ll struggle constantly saying ‘no’ to things like trips, entertainment, and all the other fun stuff your friends are doing. The up-side, however, is knowing that every dollar that goes towards your home is securing a brighter, more flexible future for you and your family.