Now Available : More Home Loans

July 19, 2013

The easy credit that crashed the housing market led to lending standards so strict that Federal Reserve Board Chairman Ben Bernanke blamed them for hurting the recovery.

In recent months, however, lenders have relaxed their grip somewhat as the market has rebounded and home prices have soared.

More ways to get a mortgage are in the offing, mostly for borrowers with solid incomes and strong track records. Real estate analysts also say rising rates could spur renewed competition among lenders.

Here are five ways that mortgage experts say the market is becoming more flexible:

1. Some lenders are easing payment and credit score requirements. Having a modest downpayment or a lower than stellar credit score won’t necessarily keep you from buying a home. Between March 2011 and March 2013, Zillow Mortgage Marketplace saw a 570 percent increase in the number of lenders offering conforming loan quotes with downpayments between 3.5 percent and 5 percent, Lantz said. That does not include the Federal Housing Administration, which allows downpayments of 3.5 percent.

If a borrower can provide a bigger downpayment, a bank may dial back on a high credit score requirement. Cecala said lenders have wiggle room because of overlays, standards they impose above those required by mortgage giants Fannie Mae and Freddie Mac.

2. Piggyback loans are popping up. The term describes two mortgages taken out at the same time for one property, so a borrower can avoid paying for private mortgage insurance on a traditional loan representing more than 80 percent of a home’s value. Piggybacks also help borrowers avoid higher interest rates on jumbo mortgages.

Jeff Lazerson, who runs Mortgage Grader, an online brokerage in Laguna Niguel, Calif., said he began offering piggyback loans again this year, allowing borrowers to refinance up to 90 percent of the value of their homes. But unlike piggyback loans in the past, he said, “With these, you have to income-qualify for it and have some skin in the game.”

He said the loans are conservatively underwritten, requiring at least a 700 credit score even if the borrower has put down more than 10 percent on the mortgage.

3. Stated income loans are back.
These don’t require tax returns to prove income, but they’re also tougher to get than in the boom days, when they were given to people with no or few financial resources and dubbed “liar loans.”

“I am starting to see lenders advertising stated income loans, which will be helpful to so many self-employed borrowers,” said Christine Donovan, a real estate broker at DonovanBlatt Realty in Costa Mesa, Calif. “The rates are not great, and it requires higher downpayments, though it seems like a step in the right direction.”

Stated income loans are important to self-employed homebuyers because they tend to have fluctuating income and frequently write off expenses, she noted, which can make it more difficult for them to qualify for a mortgage when tax returns are required.

4. Subprime loans are emerging again, but with a change. Before the housing crash, some lenders provided interest-only loans to people with bad credit and no collateral. Lenders entering the subprime market now, however, tend to require hefty downpayments from borrowers, who may have healthy incomes but went through a short sale or took another credit hit before rebounding.

“We are getting more calls and solicitations from newer lenders that are pushing subprime-type products,” said Dennis C. Smith, co-owner of Stratis Financial Corp., a Huntington Beach, Calif., mortgage firm that does not offer them.

The loans are in limited supply but are likely to be a growing part of the mortgage market, serving mostly untapped and underserved borrowers desperate for credit access, said Keith T. Gumbinger, vice president of HSH.com, a mortgage information website.

But, he added, “Any new entrants into this space will likely learn the recent (housing crash) lessons and return to the more traditional underwriting standards.” The loans also are expected to be heavily regulated.

5. Rising interest rates could encourage competition. Lantz predicted rising rates could soften consumer demand and increase the supply of available loans. Lazerson said he sees mortgage brokers and banks imposing fewer overlays in the future.

Interest rates are expected to continue increasing, with some analysts saying 30-year fixed-rate mortgages could hit 5 percent in the next 12 months. (They reached 4.51 percent last week.)

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Those benefiting from the recent easing, they said, tend to be strong borrowers or those who never deserved to be cut out of the housing market.

Smith said the FHA will accept FICO scores as low as 580, though many lenders require 620 or higher, and most have floors of 660 for Fannie Mae and Freddie Mac loans.

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