We will bottom out eventually in the real estate market but with these new and improved guidelines we will witness a solid foundation for eventual improvement in the markets.
Los Angeles, CA (PRWEB) November 22, 2010
Responding to recent news which highlights the attractiveness of FHA real estate loans and that home ownership may now be falling out of reach for more Americans as banks toughen their restrictions for Federal Housing Administration-insured loans, Richard Maize, the former leading mortgage broker in the US, provides some solutions for home owners.
"Mortgage lenders including Wells Fargo & Co. and Bank of America Corp., the two largest mortgage banks, have now raised the minimum credit score on FHA-insured loans that they will buy to 640 from 620," says Richard Maize.
"About 6.3 million people fall within that range, according to FICO, which created the formula for the ratings, says Maize. "But home owners can still find FHA or Federal Housing Administration loans which will only require a down payment of only 3.5 percent compared with the much larger upfront investments many banks require."
Richard Maize states for those asking: "I am a homeowner and I see many choices of finance programs available. What do I choose? They all look so inviting. But how do I now overcome raised the minimum credit scores?" that there are still some very positive options from which a home owner can still chose from.
"As soon as the mortgage market really loosened their requirements during the last decade, almost everyone was capable of purchasing a home due to the liberal underwriting requirements," says Richard Maize.
"No income verifications, medium credit score requirements and little money in the bank. Even at times, over 100 percent financing. As far the FHA loans are concerned, the minimum requirements were often looser. This creates a superficial boom in the real estate world. As the market continues to grow and expand because of liberal lending, if one can't make their payments as agreed, they can simply refinance and get enough cash out of the loan to pay the next year or two payments."
Maize adds: "Or of course, they can simply sell the house to the next guy and usually enjoy a nice profit. In one of these examples, lender gets their payments, or in a sale, their money returned; and the borrower goes on with free payments for awhile by way of financed money for that purpose or they enjoy a gain from the sell."
Maize says that in this example, a tragedy is waiting to happen. Markets don't and can't go up forever. If a loan is going to be made by a government body or an institution, its not that bad of an idea to have a qualified borrower by way of credit and income stream (of course there can be some rare exceptions to that rule such as a very large cash reserve or upcoming employment contract etc.) and some reserve.
These banks were loaning money to almost anyone with a pulse at very aggressive interest rates.
"As soon as something global happens to the real estate market (such as the sub-prime meltdown), then the house of cards starts and doesn't stop falling. Banks, and borrowers that really don't qualify for a loan, get their respective heads handed to them with a domino effect that will take a long time to unfold. Bottom line, I am in agreement with the new structure for lenders and government bodies to qualify a lender to make a loan to them. We will bottom out eventually in the real estate market and with these new and improved guidelines will make a solid foundation for eventual improvement in the markets. I can't say I agree with the extreme and quick swing in their approach, but these industries always react fast on a downturn out of fear."
Maize states that the extreme and quick swing pertains to the switch in underwriting guidelines . More than 50% of the loan applications were submitted and approved on either a "stated income" or "no documentation" at all. The banks gave up to 105 % of the purchase price on conforming loans and up to 100% loans up to 1 million. They shut these programs off quickly.
"In today's low interest rate environment, from the least financial sophisticated to the Ivy League Ph.d in finance, the question always seems to come up as to what loan program is best," says Maize.
"We are in a very low interest rate environment (even with the recent spikes in the treasuries). As of recent weeks, there are inflation fears that if the fears are correct, will ultimately lead to higher rates. Maybe this is a good time to lock a very long fixed rate loan; or is it? These attractive adjustables that are less than 1.5% are difficult to pass up or is it just for such a short time, you are fooling yourself? Perhaps. Let's answer some questions about the subject."
Richard Maize raises several questions asked by homeowners that are now being heard throughout the real estate industry.
"I recently purchased a home that will likely be for less than 5 years before we relocate again as my wife is pregnant with our second child and we will outgrow this home by the time this child starts school. I was offered a 5 year fixed for 3.75% yet a 3 month libor (whatever libor is) at about 1.5%. Before you answer this, please know that my new job contract will allow certain wage increases starting year 2 in my job. The first year's compensation package, although will net me enough to pay the 5 year fixed rate and my bills, it will be a slight strain without any chance for savings for me and my family. What do I do. I don't want to act foolishly by accepting the very low interest rate and have this rate race up by the end of the loan's first anniversary. Ok, what do I do?"
Richard Maize: "Lots of good information. The first question you need to ask your loan consultant is what is the rate cap on the adjustable loan program?"
"If it is 5% which means it cannot exceed a maximum of 6.5% over the lifetime of the loan, that is good to know. Also, is there a cap for the annual increase (many of these loans have a 2% yearly maximum cap). If my premise is correct, then we need to do simple math to see what is best for you. We also have to take a likely premise as to what could happen subject to error; but, we have to start somewhere on this for you. Let's assume you take the 1.5% 3 month libor (this, by the way is a relatively new American index that is "London Inter-Bank Offered Rate." It is based on rates that contributor banks in London offer each other for inter-bank deposits.) And let's also assume that the libor rates increase by 1.25% the first year and the same year two and flat for year three."
Richard Maize continues: "After three years, your rate would now be 4% with an average around 2.75%. So far, taking the short term loan is better. Then, in year four it goes up again by 1.25%. After 4 years, your average is 3.375%. (This equation will be easier if you can get the 1 year libor as your basis which is often offered along with the shorter term libor that are being offered to you). Anyway, as you can see, if you truly believe your stay is less than 5 years and you have safeguards (maximums increases), then the short term loan might be your best alternative."
"In your circumstance, even if inflation is ramped and the rates spike higher than our example, your increase in wages will offset this along with more interest rate write off with this interest could be a good offset. Lastly, if there are no caps available on these programs for you, then you need to lock in the 5 year fixed as the adjustable would be way too risky."
"Building up equity through a loan has no basis in deciding what loan to take. The first 10 years of a loan is primarily directed to interest. It is the last 7 to 9 years of a 30 year loan that has the larger build up. Any equity one may build is by and large from any appreciation in the real estate during the holding period."
"When is it the right time to pay a point or points for a loan rather than simply get a loan with no points?"
Richard Maize: "This is a very good question. If you are going to lock in a long term loan (over 10 year fixed) and you believe that the rates are low (currently, historic lows), then it is time to pay a point. Let me back up; when you pay origination point(s), it has a direct impact on the rate you are paying. Lets say for example, a 30 year fixed rate is 5% (not quoting, just as an example) with no points. the same loan with say 1 point could be 4.75%."
"Now, if rates go lower and you already paid a point, you guessed wrong. In this environment, if you are going to lock into a long term fixed loan, I would suggest paying a point (which you could add on to the principle of the loan). while enjoying the low rate, you have now bought it down to a lower rate. If this is a purchase money loan, the point is deductable (up to 1 million dollar loan amount) which makes paying the point even more attractive."
"Is there any time to take out a "hard money" loan where I would be paying 3 to 5 points and 10 to 14% interest?"
Richard Maize: "In these times where is such scrutiny to the lending field, a loan of such high rate and cost as a consumer loan (personal in nature) could be usurious unless you can convince the lender that this is a commercial loan using your residence as collateral. I missed your question; the answer is generally not a good idea. Here is where that loan could come into play: you have an opportunity to buy say an apartment building for far less than market value due to the necessity of the seller or it being a bank owned property. One of the requirements is that you close very quickly."
"You can't get a conventional loan as quickly as you need to close and the deal in your opinion is amazing. figure the costs of this loan as part of the purchase price and see if it is still a great deal. Most likely if it was a great deal before, the cost of this "hard money" loan won't change the numbers that dramatically providing you diligently refinance them out conventionally. the key to this scenario is that you don't let the lender add a prepayment penalty clause in the note.""On other side of the coin. If, the lender can figure out how to loan on a consumer basis using your home as collateral, generally the answer is run for the hills and whatever short fix this expensive loan will do for you, is just that. A short term fix. You are better off trying to deal with the current lender if it a problem with you current mortgage. Borrowing at a high rate to get money that you intend to pay back, is a very desperate proposition."
"What will a rate increase do to the real estate market both in residential and commercial?"
Richard Maize: "Rate typically have an inverse reaction to the value of real estate. When rates go up, those borrowers with the same income can buy a less pricey property because of the increase in mortgage cost. For example, if you can spend $5,000 per month on your payment and say that represents a $900,000 mortgage. If the rates went up that same $5,000 monthly payment could possible represent a $840,000 mortgage. If that scenario continues then the mortgage that be afforded will be continue to be reduced. The same goes for income property. The same income will represent a lower cash flow with a higher interest rate."
Maize concludes: "In both examples, the downward pressure prevails on the value/sales price to keep the demand constant."
Richard, who communicates both off and online with recent college graduates, established the Rochelle and Richard Maize Foundation - a philanthropic organization that supports, contributes volunteer and financial resources to causes locally in the LA community and worldwide supporting programs focusing on art, culture, sports, family services and health care that work to help people live more fulfilling lives.
Richard Maize has generously supported a variety of organizations and causes including the American Cancer Society, Vista Del Mar Child and Family Services, Hurricane Katrina, Los Angeles Police Foundation, the Beverly Hills Police and Fire Department, the Cedars Sinai Board of Governors, Israel Flying Aid in earthquake devastated Haiti and the Maccabiah Sports Games in Israel.
Richard Maize and his wife, Rochelle Maize, are longtime benefactors of many other non-profit local organizations in LA and globally where Richard has been recognized for his humanitarian efforts on behalf of dozens of charitable groups and community projects.
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