from Florida Realtor Magazine, December 2007 | by Richard Westlund | page 28

Tighter Credit: How to Get It

Mortgage money is still readily available in Florida, and interest rates remain at historic lows. Here are some practical steps you can take to help buyers and sellers handle the financial side of their transactions.

Like real estate professionals throughout Florida, Sue Silberbusch has been affected by the nationwide mortgage crunch. “It’s certainly hit Central Florida,” says Silberbusch, a sales associate with Realty Executives/Orlando in Longwood who specializes in luxury homes. “Many of my clients are dealing with jumbo loans (a mortgage with a loan amount above the industry-standard definition of conventional conforming loan limits), which are tough to get these days. While interest rates are still low, buyers in all price ranges are finding the standards are stricter than before.”

Throughout 2007, the nation’s mortgage market has been in turmoil. Many recent buyers with marginal credit or income problems have been unable to keep up with rising monthly mortgage payments, resulting in an increased number of nonperforming loans and foreclosures.

Those credit problems have caused more than 150 financial institutions, primarily those serving the subprime lending market, to close their doors. Other lenders are cutting back staff, reducing product lines and increasing their loan-loss provisions. In turn, the major players in the secondary mortgage market—Fannie Mae and Freddie Mac—have been tightening their scrutiny of lenders’ underwriting standards.

Even so, mortgage money is readily available in Florida, and interest rates remain at historic lows. There are plenty of practical steps Florida real estate professionals can take to help buyers and sellers handle the financial side of their transactions.
“Working with a good mortgage professional is critical,” says Michael Lefevre, CEO, National Association of Mortgage Professionals, Irvine, Calif. “There are companies closing down and others opening up. There’s still financing available for individuals to purchase homes. Today it’s a team effort, where a real estate agent and a mortgage professional sit down and spend time with the client.”

Seller’s Perspective
In a tighter credit market, listing agents need to take a proactive approach to assessing a potential buyer’s financial status.
“Today, an owner has to be prepared for the worst instead of the best,” says real estate consultant and trainer Mike Ferry, Newport Beach, Calif. “That means at any point during the pending sale, a lender can back out or go out of business.”
However, you can take action to keep the transaction moving forward. Bill Richardson, district sales manager of The Keyes Co./Realtors® in Boca Raton, says it’s important to review the stability and credentials of the lender that has prequalified the buyer.

“You want to look for a large, nationally recognized lender that has a presence in your local market,” he says. “There’s a greater risk that a small company might cut back its lending programs or go out of business.”
Richardson has several other suggestions:

• Request from the buyer a copy of his or her credit report. Most contracts give the seller and listing agent the right to see the buyer’s mortgage information; however, that might not include the credit report. “We’re asking buyers to give us a copy of that report with the Social Security number blacked out for security,” he says.

• Ask for a larger down payment. If the buyer can put more money down, a lender is more likely to approve the mortgage loan.

• Offer owner financing. Sellers who do not need immediate cash from the sale may consider holding a first or second mortgage, making it easier for the buyer to afford the home.

Another option, according to Silberbusch, is a lease purchase contract that allows the buyer to rent the home for a year or two before closing the transaction. While sellers are generally not thrilled with this option, she says, it can be a way for them to cover their mortgage payments and move ahead with their personal plans.

And there are other ways a seller can provide financial assistance to a potential buyer, such as paying some of the closing costs. This allows a buyer to increase their down payment or to reduce the loan amount necessary to finance the sale.

But listing agents should be aware of what seller concessions are available and allowable under lender guidelines, says Charlie Rogers, executive vice president, Countrywide Home Loans, Miami. “There are limits to the concessions that can be offered to borrowers based on the loan-to-value (LTV) ratio,” he says. “If the borrower is looking for 95 to 100 percent financing, the seller is only allowed to offer 3 percent of the sales price as a concession. If it’s 10 percent down, the seller can only offer a 6 percent concession.”

And, the U.S. Department of Housing and Urban Development (HUD) recently proposed a rule that “preserves HUD’s long-standing policy of permitting FHA-insured borrowers to rely on down payment assistance from family members, employers, governmental entities, or charitable organizations.  But it clarifies that the down payment funds cannot be derived from sellers—directly or indirectly—or any other party that stands to benefit financially from the transaction,” according to Lemar C. Wooley, a public affairs officer with HUD. According to the ruling, nonprofits may still play a role in providing down payment assistance in the form of a gift as long as they don’t collect “donations” from sellers, who have a financial stake in the sales transactions.

Another seller’s option is to make a one-time payment to the lender at closing to buy down the buyer’s interest rate, reducing the monthly payment. “This is a tool often used by new-home builders, but not in the resale market,” says Rogers. “Now, real estate professionals need to sit down with sellers and make them aware of these types of financial strategies to gain that competitive advantage.”

Working with Buyers
For real estate professionals working with buyers, it’s vital to understand that the most important steps in the loan process occur at an early stage in the transaction.

“Now, more than ever, it’s vital to get prospective buyers prequalified,” says Rogers.

While qualifying ratios—in terms of a buyer’s debt payments and monthly income—haven’t changed, lenders are requiring more documentation on loans, such as verifying an applicant’s income, as part of their underwriting practices.

And because of the instability in the nation’s mortgage market, Ferry suggests having the buyer prequalify for a loan with several different lenders. That provides a big advantage when negotiating with sellers and potentially gives the buyer several options for obtaining the right financial package.

“A buyer should comparison shop with [at least] three lenders, including a bank and a local mortgage broker,” says Ritch Workman, owner of Workman Mortgage Co. in Melbourne and president of the Florida Association of Mortgage Brokers. “An educated consumer will get the best mortgage value.”

Workman notes that a mortgage loan can be structured in different ways, depending on the buyer’s situation, such as having the buyer pay an extra point or two at closing to lower the ongoing payments. Alternatively, the loan-origination fees could be minimized in exchange for a higher monthly payment. “There is no right or wrong answer to questions like these,” he says. “It’s a discussion that involves the buyer and the lender.”

Michael Pruitt, president of Pruitt Real Estate in Melbourne, says there are plenty of mortgage funds available for qualified borrowers. “Buyers with reasonably good credit are still getting financing at competitive rates,” he says. “But they have to be careful about the lender. We advise buyers to deal with a reputable local lender—who could be part of a large national organization—who knows the local market. That’s the best way to get the financing in place without delays.”

Mortgage experts suggest several strategies for buyers seeking a mortgage loan:

• Obtain a recent credit report and review it with a mortgage specialist. There may be ways to raise the credit level prior to applying for a loan.

• Increase the down payment. Since risk-averse lenders are avoiding conventional 95 to 100 percent mortgages, an applicant who can make a 10 to 20 percent down payment is much more likely to be approved.

• Be prepared to verify income and assets. It’s far more difficult to obtain “no-documentation” or “low-doc” loans today because of stricter underwriting standards.

• Apply for a government-guaranteed loan from the Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA). These loans can finance up to 100 percent of the purchase price (see “FHA and VA Loans”, page 31.)
“Now that the lending market has changed, the FHA has become a very viable source of funds for people with bruised credit,” says Rogers. “And with more veterans returning from Iraq, the VA market is also growing and those loans are more available today.”

Once the mortgage loan has been approved, Rogers says, borrowers should continue to stay in touch with the lender—just in case something changes.  “In the past, the guidelines for lending programs didn’t change for years,” he says. “Now, there are changes daily. As a result, a buyer who was prequalified in August might find that particular loan is no longer available in October. So it’s important for buyers to stay in contact with the loan officer to make sure everything with the financing is still good to go.”

What Happens Next?
Looking ahead to 2008, many observers expect greater stability in the nation’s lending market. After all, the subprime lending sector at its peak was only about 15 percent of the mortgage market. And borrowers are still making their monthly payments on 85 to 90 percent of those subprime loans, according to Ben Stein, a New York–based economist.

Workman expects that some of the subprime mortgage programs will begin to return, although underwriting standards definitely will remain high. “Real estate professionals can focus on helping to educate subprime borrowers about elevating their credit score or putting down more money,” he says. “Basically, we’ve gone back to the old days, where buyers had to save up for that down payment.”

Florida sales associates should continue to monitor trends in the mortgage industry, while expanding their contact with local financial specialists, advises Lefevre. “This is a time to meet the new players in town and form new professional relationships with lenders in your market,” he says.

That’s a viewpoint shared by successful associates like Silberbusch. “Knowing good mortgage professionals is more important then ever. Buyers need to work with aggressive, intelligent mortgage lenders who can find the program that’s best for their needs.” 

Richard Westlund is a Miami-based freelance writer.