John SkinnerThough everyone knows that lenders have tightened their rules about making loans, most people don’t understand what that means when they are shopping a loan for a purchase or a refinance. If the only real estate loan a borrower has obtained was within the last seven years, they are in for a shock.
The conforming loan limits in Los Angeles have raised to $729,750 but these loans, known as conforming Jumbo loans, have a higher rate, about a half a percent, 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 most lenders are no longer offering jumbo loans. As late as last year, loan brokers had access to over 80 different banks offering jumbo loans. The number is now less than 15.
What constitutes great credit in 2009?: Two years ago a good FICO was 700 or better. In today’s world a 700 FICO will cost you money. If you check out a chart of 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.
Income is 1099 based = Tough: Today many lenders turn a blind eye and a deaf ear to 1099 employees. There are a few lenders making stated income loans. 1099 based borrowers must have large reserves, great credit and proven income minus tax write-offs over the past two years.
20% down might not get it done: On a conforming loan ( $729,750-) 20%-25% down and good credit (720 FICO+)will usually work. 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 upfront fees.
For a loan over $729,750 then 20% and good credit isn’t enough. You may find lenders wanting 35%-50% down with great credit (750+ FICO) and a good chunk of cash in reserve.
Adjustable rate mortgage might not make sense: Borrowers 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. However, a few private banks and wealth management companies are offering extremely competitive rates for 7/1 and 10/1 terms provided you have great credit and strong cash reserves. For interest only loans, add at least another .25% or more to the rate.
Refinancing can be tough: Some lenders are looking for 30%-40% equity on a refinance in markets they feel are trending downward. Lenders are not real crazy about cash out refinancing. There are some who have those programs but the fees are high.
In today’s market the best way to ensure you get a loan is to do your homework. 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, cash in the bank can buy a lot of goodwill and provide you with a great opportunity to take advantage of this market.
