Property values are rising in many parts of the country, and prime home-shopping season is approaching. Some buyers are rushing to get mortgages before the Federal Reserve raises interest rates, which could happen in the coming months.
Lenders, for their part, are trying to coax more borrowers to enter the housing market by accepting smaller down payments and offering lower interest rates on certain loans.
Mortgages aren’t one-size-fits-all. The best deals and strategies often vary significantly depending on whether you are taking out a “jumbo” mortgage or looking for a modest first home.
Borrowers who are refinancing an existing mortgage, trading up to a larger home or contending with a less-than-ideal credit score also can have different options or challenges to overcome.
Here is how to find a loan that is tailored to your situation:
Going Jumbo
Buyers who live in the priciest housing markets or who are shopping for expensive homes often need to take out a so-called jumbo mortgage, which is a loan that exceeds $417,000 in much of the country and $625,500 in New York, San Francisco and several other large metropolitan areas.
Sekuleo Gathers, a 38-year-old physician, took out a roughly $700,000 mortgage to buy a home in River Edge, N.J., in December after learning that the rent on his apartment in Brooklyn, N.Y., would rise to $4,400 a month.
“It pushed me to say, ‘It’s time,’” he says.
Those loans are too large to be sold to mortgage giants Fannie Mae and Freddie Mac,which means banks typically hold them on their books. That gives banks more flexibility to set their own interest rates—and many have been offering lower quotes for jumbo loans than for smaller mortgages recently.
Large lenders quoted borrowers who planned to make a down payment of 20% to 30%—and who said they had a credit score of at least 720—an average rate of 4.05% on new 30-year fixed-rate jumbo mortgages in 2014’s fourth quarter, according to real-estate website Zillow. The average rate those lenders quoted similar borrowers for smaller mortgages was 4.23%.
Applicants for jumbo mortgages should include large lenders in their search. Such lenders may offer better deals than smaller rivals, which quoted similar borrowers an average rate of 4.11% on jumbo mortgages, according to Zillow.
Jumbo mortgages made up 19% of all the home loans given out in 2014 by dollar value, according to Inside Mortgage Finance, a trade publication. As with most types of mortgages, the total loan amount declined from a year earlier—by 14%, in the case of jumbos.
The decline in new mortgages has made banks eager to entice many types of borrowers, and may have increased the incentive to sign up jumbo borrowers in particular. Many banks hope to offer other potentially lucrative services to applicants for jumbo mortgages.
“If [someone is] going to do a jumbo mortgage of $700,000 to $1 million, chances are she’s got some money,” says Mike McPartland, head of investment finance for North America at Citi Private Bank, a unit of Citigroup. “She’s got other things that to me as a banker are interesting: Who’s going to manage your retirement money? Who’s got your bank account?”
Take advantage of that kind of eagerness. Citi Private Bank allows lawyers who are partners at certain law firms to make down payments of as little as 10%, instead of the typical minimum it requires of 20%. Bank of America allows many doctors to make down payments of as little as 5% for mortgages of up to $1 million.
Citi Private Bank and UBS’s wealth-management banking group also allow clients to use a brokerage account maintained at the bank as collateral in lieu of a traditional down payment. The funds can remain invested and the borrower could avoid a tax hit from cashing out.
If you plan to take out a jumbo mortgage, it is worth starting your search at a bank where you keep most of your deposits or where you already have other ties, because that bank may be eager for a deeper relationship. Also seek out offers from other lenders, and then ask the original bank if it will beat any that are more attractive.
Buying a First Home
Lenders are lowering the bar for home buyers seeking a first home by letting them make smaller down payments—an option that could appeal to young buyers and others who haven’t amassed significant savings.
In September, Regions Financial began offering mortgages to first-time buyers with down payments as small as 5%. TD Bank, the U.S. unit of Toronto-Dominion Bank, lowered its minimum down payment to 3% for certain borrowers last year. Nonbank lender Social Finance, which is based in San Francisco, began giving out mortgages last year and is permitting 10% down payments for home loans of up to $5 million.
Some lenders allow for no down payment. Navy Federal Credit Union, the largest U.S. credit union by assets, doesn’t require a down payment for mortgages of up to $1 million.
The catch is that lenders often charge a higher interest rate on such mortgages. Navy Federal Credit Union, for example, charges at least 4.75% on a 30-year fixed-rate mortgage of $400,000 with no money down. With a 20% down payment, the minimum interest rate is one percentage point lower.
Some lenders require mortgage insurance when accepting a low down payment rather than charging a higher interest rate. Such insurance is often a recurring monthly charge, but can sometimes be an upfront one-time payment. Borrowers need to figure out whether a lower interest rate would compensate for the cost of that insurance.
One option is to get mortgage insurance from the Federal Housing Administration, which lowered its monthly insurance fee for new mortgages in January. The FHA currently requires a down payment of at least 3.5% on mortgages it insures, and borrowers who make that down payment will have to maintain the insurance for the life of the loan.
Other insurance providers allow borrowers to drop the coverage after a certain level of equity is reached.
Also, consider the risks of putting little or nothing down. If home values decline, you could end up “underwater”—that is, owing more than the house is worth.
First-time buyers should consider seeking preapproval for a mortgage before house shopping, so they have a clear sense of what they will be able to afford. Applicants generally need to provide their income, assets and debts, and other information.
Also, if you are unsure how big of a down payment you will be able to make, consider looking for a lender willing to let borrowers accept contributions from family or friends.
Trading Up
If you already own a home and are looking to move to a larger one, timing can be important. The ideal scenario is often to sell your existing home just as you are about the buy the new one, particularly if you need the money from the sale to make a down payment.
Kruger Donald, 53, made an offer on a house in Corpus Christi, Texas, and started the mortgage application process about a week after he accepted an offer on his home in Jacksonville, Fla. He says he used $15,000 from the sale as a down payment on the new ranch-style home, which he purchased in November.
“It was so crazy the way the timing went down,” says Mr. Donald, who is a captain in the U.S. Merchant Marine. “The way everything fell into place was just uncanny.”
Unfortunately, it doesn’t always work out that way and a borrower may need to move on the purchase before the sale is complete. One option is to apply for a short-term loan, which allows borrowers to get cash for a down payment by using their existing home as collateral.
Yet since the housing downturn, few lenders offer this type of “bridge financing,” saysKeith Gumbinger, vice president at mortgage-information website HSH.com.
In addition, borrowers generally need to have at least 20% equity in the existing home. The loans can require repayment in six or 12 months, he says.
Another option for borrowers who have a lot of equity in their current home is to sign up for a home-equity loan and withdraw the amount they expect to need for a down payment on a new house. In most cases, they will have to get this loan before they list their home for sale.
The payments on a home-equity loan may be more manageable than on a bridge loan since they are spread out over a period that could run as long as 20 years.
But getting the mortgage on your new home could be more difficult if your debt load is high. Many lenders require that monthly debt payments amount to no more than 43% of a borrower’s monthly pretax income, Mr. Gumbinger says.
Buyers who are trading up may be better off selling their house before they sign a contract to buy another home. Consider trying to work out an arrangement with the buyer of your home that will allow you to stay and pay rent while you search for a new house, says John Schleck, a mortgage-sales executive at Bank of America.
Refinancing
The refinancing wave that began in 2009 began to ebb in mid-2013 when interest rates rose. The total volume of refis dropped nearly 55% in 2014 from a year prior, as measured by dollar value, according to Inside Mortgage Finance.
Demand for refis ticked back up early this year after mortgage interest rates pulled back in January. Refinancing applications accounted for almost 74% of all mortgage applications in mid-January, the highest level since mid-May 2013, according to the Mortgage Bankers Association, a Washington-based trade group.
But the window of opportunity could close in a hurry if the Fed raises short-term interest rates soon.
For a refinancing to make financial sense, you likely will need to lower your interest rate by at least one percentage point, says Mr. Gumbinger, of HSH.com. Refis can work with a smaller drop for borrowers with a jumbo mortgage, he says.
Look into closing costs, as well. Those can equal about 2% of the loan amount, Mr. Gumbinger says. Then figure out how much time you will need to pay the mortgage with the lower interest rate to recoup the closing costs.
Consider a borrower who got a 30-year fixed-rate mortgage of $400,000 in August 2013 with an interest rate of 4.69%. If the borrower refinanced now and got an interest rate of 3.87% on a similar mortgage, he or she would end up with a monthly mortgage payment of $1,833, or about $239 less a month, according to Mr. Gumbinger.
However, if the borrower paid $7,800 in closing costs—about 2% of the loan amount—it would take nearly 33 months to recoup those costs and start pocketing actual savings from the lower interest rate.
Overcoming Credit Issues
Most lenders have avoided giving mortgages to borrowers with low credit scores since the housing downturn.
But some are slowly loosening standards or looking for ways that borrowers with weak credit can compensate for low scores.
For example, 14% of banks reported easing their credit standards “somewhat” on mortgages that are eligible to be sold to Fannie Mae and Freddie Mac, according to a January survey by the Federal Reserve.
The mortgage giants typically only purchase loans if the borrower has a FICO credit score of at least 620. FICO scores were developed by San Jose, Calif.-based Fair Isaac Corp. and are the most widely used scores for consumer lending.
Wells Fargo, the largest mortgage originator by volume, lowered its minimum FICO score requirement for Fannie and Freddie mortgages to 620, down from 660, last year.
Navy Federal Credit Union has no minimum-credit-score requirement, and is reviewing applications it initially rejects for other ways an applicant could meet its lending standards, says Katie Miller, vice president of mortgage lending. That might mean a larger down payment or a smaller loan, she says.
Applicants with low credit scores should consider working with a mortgage broker who has access to many lenders and can let applicants know if they are likely to get approved and what interest rate they are likely to pay.
Courtesy of The Wall Street Journal
Courtesy of The Wall Street Journal
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