Tuesday, September 25, 2007

New Lending Restrictions?

What I have been hearing in the past few months since the fall of the sub prime market is that restrictions on home loans have tightened. I had heard that your credit score must now be above 720 and you must have a minimum of 10% down. I had also heard that the lenders had cut some of their loan programs such as those that did not require you to document your income or your assets; they would simply take your word for it. Not any more, they said. It was proving to be too risky as the default and foreclosure numbers were multiplying before their eyes. It seems, however, that although some of the restrictions had tightened initially, things are already starting to loosen up.

A very nice man walked into my open house this past weekend and mentioned he was looking for a house that had a lot of bedrooms so that he could rent out some of the rooms to help pay his mortgage. It turns out I had helped somebody do this same thing last year so I am familiar with the game plan. My past client bought a house in the Excelsior. He lives in the in-law unit and rents out the main part of the house leaving him responsible with only a small portion of the mortgage. He purchased the home with 100% financing, and although he did have some cash reserves, he did not have to pay a penny out of pocket for the house or closing costs until the first mortgage payment was due. The seller paid the closing costs. This is rare in San Francisco, so don't get any ideas!

The man in my open house seems to be in the same situation. He also has some cash reserves but would need help coming up with the mortgage on a monthly basis. He mentioned that he does not have enough for a 10% down payment but could possibly put 5% down. I told him that he would need to get his financing in order first, and that it might be difficult for him based on the newer, tighter credit restrictions.

Boy was I wrong! He called Countrywide straight away. Countrywide is a national bank known to do sub prime lending; they have really suffered in the credit crunch. I think it is 12,000 employees who lost their jobs? Anyway, the very nice loan consultant he spoke with there mentioned that they not only have loan programs with 5% down payments, but they still do 100% financing. I was very surprised. He mentioned that some programs had been cut initially, such as the stated income/stated asset program, but they recently had started to come back.

It seems some banks are still eager to lend money to just about anyone. Hopefully there has been some lesson in all this, for the banks I mean. The lessons for the borrower are clear. Be conservative. Be sure you understand the terms of your loan. Read the fine print.

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