Mountain Mortgage Guy: New loan programs bring more buyers to the marketplace (column)
September 19, 2018
After the financial meltdown in 2007, mortgage loan approval standards got to be pretty Draconian. Borrowers had to prove every last nickel of their ability to repay the loan, and then some. This resulted in millions of homeowners being trapped in their homes because if they sold, they could not qualify to buy anything else. It also shut out many potential buyers.
To a certain extent, things did need to be tightened up. Indeed, a cashier at Walmart could easily become a land baron if they were willing to make numerous misstatements, and the rule of the day was trust but never verify. But things really went a bit too far when individuals with low loan to values, excellent credit and lots of cash could not get a loan.
There have come to be two types of mortgages, qualified and nonqualified, in terms of meeting many of the requirements imposed on lenders. Qualified loans fell within strict federal guidelines in terms of documentation and ability to repay. Nonqualified mortgages are allowed but cannot be eligible for government backing and may fall outside of the requirements in terms of documentation of credit worthiness.
Nonqualified mortgage loans are now the fastest-growing segment of the mortgage market, and while they are not the loan programs of yesteryear that merely required the borrower to be able to fog a mirror, they open some interesting opportunities for buyers who don't qualify for traditional financing.
One lender has recently begun offering no-ratio asset-based loans whereby the borrower's income and employment are left blank on the loan application. Instead, the borrower must have at least a 720 FICO score, a substantial down payment (generally 20 percent or more) and enough liquid assets to pay all of their monthly minimum payments for five years. The rates will vary depending on several factors, but a five-year, fixed-rate loan in the low 6 percent range is possible.
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How this would work for, say, someone buying a $600,000 home would be first to have $120,000 (20 percent) to put down. At 6.375 percent, the monthly payment would be $2,995. Let's assume taxes and insurance are $400 per month and that the borrower has car and credit card payments of $750 per month for a total overhead of $4,145. To qualify for a no-ratio loan, the borrower would need an additional $248,700 ($4,145 x 60) in liquid assets available after the down payment and loan closing costs.
There would be, in this case, no paystubs, W-2s or tax returns. The lender would verify assets, credit score and history (no late housing payments within 36 months) and get an appraisal and review the title work and that would pretty much be it. While the rate is about 1.5 percent higher than a conventional loan, this program could be a useful tool for many homebuyers or homeowners who need to take cash out.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related questions from readers. His website and blog can be found at http://www.mtnmortgageguy.com.