Temporary Mortgage Loans and Buying a Home

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Temporary Mortgage Loans and Buying a Home

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Many people during the last year who have tried to get a mortgage in order to buy a home have suffered the effects of the current credit crunch. This article visits a few of the effects of the crunch including the disappearance and temporary appearance of some mortgage 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 correct the plight of high losses was so severe that maximum loan-to-value (LTV) percentages were decreased for conforming full-documentation mortgages for houses located in declining markets (areas where home values have decreased). The reduction was instituted to ameliorate default rates, and is being lifted during the summer 2008 under certain circumstances.

Conventional/conforming loans (non-governmental loans equal to or less than $417,000) and FHA-insured loans have been popular during the first six months of this year (2008). Borrowers with poor credit have the prospect of qualifying with both types of loans, although the FHA-insured mortgages may limited to a minimum credit score of 580. FHA mortgages permit a slightly higher loan-to-value ratio (lower down payment) than conventional mortgages.

Here are three new (and temporary) mortgage programs:

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
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