The summer of 2010 will go down in banking history for its historically low mortgage rates. Not to mention the summer of surprise for many borrowers, who are discovering that tighter underwriting laws, declining property values and bad borrowing decisions can torpedo a chance to get in on the low rates.
On Thursday — for the sixth time this summer —rates dropped to their lowest level in decades. The national average for a 15-year mortgage dipped below 4 percent.
Rates haven't been this low since the 1950s.
Mortgage lenders across the Wichita area are busy, with 75 to 80 percent of their business now focused on refinancing.
Home sales have markedly slowed after the April 30 deadline for contracts to capture federal homebuyer tax credits passed.
Three of those area lenders — Dan Jones of Capitol Federal, Gary Schmitt of Intrust Bank and Julie Huber of Equity Bank — agree that this summer is the best time in history to take out a new mortgage.
But, they also agree on another fact: The criteria to do those mortgage deals hasn't been this tough in decades, a byproduct of the housing collapse that brought down the American economy in 2008.
"I think the main thing that a lot
of people don't realize is the standards for underwriting are so much tighter today than they used to be," Huber said.
"More complex, more verification is done on income and assets. It requires more documents to come in. It's a big surprise for people."
Where are rates today in the Wichita area?
It depends on the lender, but 30-year fixed rates appear to range between 4.25 and 5 percent.
For 15-year loans, the number drops into the low 4s. And if the borrower wants to pay a fee known as points, the rate can be brought down even further to slightly below 4 percent. However, the lenders say they're not seeing a lot of interest in rate buydown.
Will rates go down more?
No one can say based on the current economic uncertainty. While rates may decline a little more, most mortgage experts suggest that you not wait.
The general expectation is that rates will eventually begin to increase, making now a good time to refinance or buy.
What do I need to refinance or buy a house?
"If you have a decent credit history and job stability, generally you're going to qualify," Jones said.
"We do (purchase) loans up to a maximum of 97 percent conventional, taking someone with a credit score of 720 or above. We do FHA (Federal Housing Administration) as high as 96.5 percent loan to value, with a credit score as low as 660. Generally, the more money you have for a down payment, the lower the credit score we can take.
"We can go as low as 620. If they're less than 620, then they have some substantial credit challenges and they're in a position that they need to work on their situation. It's something most people can do in a year or so."
Schmitt said if a borrower has a score over 650 "you've got a shot."
"But you almost need to be around 700 to be sure you're going to get in," he said.
There also are debt-to-income ratios that must be met, Huber said.
For example, if someone had an annual income of $100,000 and $40,000 in debts, they would have a 40 percent debt ratio.
The ratio is figured two ways.
The first is a front-end percentage which compares the monthly house payment to a family's income. That debt ratio can be in the low 30s, Huber said.
The second way is the back end. That method compares all debts, including the entire mortgage, to a family's income. Equity Bank limits that percentage at 41 percent, which Huber said is fairly standard.
What percentage of your walk-in business fails to meet those standards?
Quite a few, Huber said.
"A lot of people are coming in with back-end numbers in the high 40s, and that's just not going to work."
Jones said a fairly common problem is people who have lost or changed jobs and are making less than when taking out the original loan.
"So, their debt structure to income is different, and that's problematic for qualifying for a new mortgage, even though hypothetically their payment could be less," he said.
Home equity loans — second mortgages — are a major obstacle to a refinance. What are the problems home equity loans create?
Jones said a lot of second mortgages were taken out as a home equity line of credit, a revolving account.
That can become a problem if the two mortgages equal more than 80 percent of the home's value.
While you can buy a house under certain circumstances for less than 20 percent down, the rules are different for refinancing. Many lenders will require you to have at least 20 percent equity in the house to refinance.
"You're generally going to limit a lot of refinancing transactions to 80 percent loan-to-value, and people with two mortgages might find themselves above an 80 percent loan-to-value ratio," Jones said. "It could be a killer, a real deal spoiler."
The secondary underwriting market wants that 80 percent loan-to-value, Schmitt said.
Property values are up in some areas, down in others. What effect do appraisals have on refinancing?
The current market is less active than it was three years ago, and fewer sales have an impact on property values, Jones said.
"People in some parts of town are going to have value problems," he said. "Their homes could possibly be worth a different amount than they paid because of the lack of comparable sales....
"Our market is far stronger and more stable than most, but to say that there's been no change of values here isn't an appropriate representation of the facts."
Are refinancing customers more concerned with lowering monthly payments or limiting the amount of interest paid over the life of their mortgage?
"We're seeing people pretty conscious of shortening the length of their loan," Huber said. "It's a little of both, actually, but we've got some people who've gone from a 30-year rate under 6 and refinanced at the 15 without a lot of change in their payment, maybe up $50 at the most."
Jones said Capitol Federal is seeing more people with strained cash flow.
"The majority of our customers are trying to improve their cash flow because they've gotten a little overextended with consumer debt," he said.
What are some financing tools that can be used to improve a borrower's cash flow or limit the amount of interest over the life of their new home loan?
"The adjustable rate mortgage gets a bad rap because it was misused, but I think an ARM is a good tool when it's used right," Schmitt said. "It's a good tool to use depending on the individual borrower's circumstances and how long they want the house."
Most people don't stay in a house more than five to seven years, Schmitt said.
Intrust Bank offers a five-year adjustable mortgage at 3.625 percent. That means the interest rate will stay stable for five years and then will adjust up or down. It also offers a seven-year adjustable at 4.125 percent.
A recent law caps the amount that interest can go up over the life of the loan at 4 percent. That means someone taking out the five-year adjustable mortgage at 3.625 won't have to pay more than 7.625 percent in interest over the life of the loan.
"The biggest challenge right now is educating people about the ARM" and the idea held by some consumers that it's bad, Jones said, "And it was, unfortunately, in some lender products."