Buying a home has been tougher due to the mortgage crisis and the resulting credit crunch. This article describes some of the consequences of the crisis including the discontinuance and temporary appearance of some loans.
The serious losses suffered by Government Sponsored Enterprises (GSE’s), Wall Street firms, and other investors across the United States brought about credit tightening and the disappearance of the loan products that caused these losses. The leading culprit was the high-risk, 100% CLTV 2nd mortgages on investment properties, most of which were executed with Stated Income and Stated Income Stated Asset (SISA) documentation. This loan type started disappearing two to two and a half years ago with credit tightening or discontinuance happening rapidly. Other high-risk loan types that resulted in significant damage were the Owner Occupied SISA and No Doc loans. Most lenders no longer offer these loans.
The struggle to mitigate high losses led to maximum loan-to-value (LTV) percentages being reduced for conforming full-documentation loans for homes in declining markets (areas where home values have gone down). The reduction was done with the hope that default rates would decrease, and is being lifted this summer 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 temporary mortgage programs that came about because of the current mortgage crisis:
FHASecure - this is a refinance loan insured by the Federal Housing Administration and is available for homeowners with a non-FHA adjustable rate mortgage (ARM). Originally intended for people who had defaulted on their ARM, or would likely default when the rate reset, it is now available 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 or Conforming Jumbos - Jumbo loans are mortgages for amounts above $417,000. Loans values equal to or smaller than $417,000 are “Conforming” loans. Conforming loans and Jumbo loans normally have different guidelines that must be met in order to qualify for the mortgage. However, through the end of 2008, borrowers wanting loans up to $729,750 can qualify under the regular Fannie Mae and Freddie Mac conforming loan guidelines with the addition of some underwriting restrictions. The county limits established by HUD determine the actual maximum loan. These loans are available only for 1-unit purchases (i.e., the maximum does not apply to duplexes).
HUD’s county limits can be viewed at: https://entp.hud.gov/idapp/html/hicostlook.cfm