by Misha Weidman:
I’ve been talking to lenders over the last few weeks to get a sense of the credit crunch from their side of the desk. Several were loan officers at big retail banks like Bank of America and Wells Fargo. Others were independent loan brokers who have access to a greater range of loan products because they are not tied to a single bank.
Though there was a range of views on how slow and difficult the home loan business has become, everyone agreed that underwriting standards – the rules the banks use to decide whether to lend or not – are a world away from where they were just a year ago. You’d better have a stash of cash ready to go for your down payment and your credit score better be impeccable – or you’ll pay for dearly for it, if you can qualify at all.
That’s the bad news. The good news is that with the Fed and the Federal government continuing to pump money into the system, mortgage rates are near historical lows and may continue to drop if the banks actually start lending in earnest rather than hoarding cash.
I asked the lenders to assume we were talking about a loan of around $1 million on a primary residence worth $1.2 to $1.5 million. Here are some highlights from my conversations:
· Underwriting standards. Is it hard to get a loan right now? “Don’t even bother unless you’ve got perfect everything,” said one loan officer. You’ll need perfect credit, a stable job, assets, and the paperwork to back it all up. Perfect children and teeth are not required – yet.
B of A says they still have some flexibility and that their underwriting standards have always been pretty strict — that’s why they’re still around. Still, you’ll need a minimum credit score of 680 to get in the door.
All the lenders said that they offer discounted rates to the best-qualified customers. A credit rating over 720 could result in an increase in the maximum loan amount, a one percent reduction in interest rate, and zero points on the origination fee. What’s the new mantra for this? “Risk-Based Pricing.”
· Downpayment. Figure 20 to 25% of the home’s value. 30% if you’re looking for a loan over $1 million.
· Fixed Rate Mortgages. On a fixed-rate 30 year jumbo loan (those over $625,500) I got quoted rates as low as 6.0% and as high as – wait for it – 7.5%. Figure 1 to 1.5% points for an origination fee. Unless you’re a “preferred client” with a bank, zero point loans are effectively non-existent or at such high rates that you’d be unwise to take them under most circumstances.
· Adjustable Rate Mortgages (ARMs). Fuggedaboutit. They are effectively a thing of the past – at least for now.
For the masochistically curious B of A is quoting 6.85% on a 5/1 year ARM, plus 0.95 points for the privilege. In case you missed it, that rate is higher than the rate on a 30 year fixed rate loan. Go figure.
One independent loan broker had exactly one ARM product that sounded sensible: 3 years at 6% for zero points, but you’ll need to be a top-tier borrower in every respect to qualify.
· Banks versus Brokers. Craig Thomason, an independent broker with over 20 years in the business, says “the jumbo market [loans over $625,500] is very limited right now.” If you’re looking for a loan over that amount, you’re going to get the best rates from a retail bank, preferably one with whom you already have a hefty bank account.
Thomason said he and other loan brokers are competitive on non-jumbos loans and in situations where you need some flexibility because you can’t meet the retail banks’ qualifying standards. You’ll pay for that privilege though swith higher interest rates and origination costs.
· Refinancings. Basically the same underwriting requirements and rates as for a new loan. Expect to pay more if you want to take money out.
5 thoughts on “How Real Is The Credit Crunch? Try Getting A Loan”
Misha, thanks for doing some real legwork and posting the findings. Loans are not at near historic lows, well maybe in the context of all time history they are relatively low, but not in terms of simple 12/24/36months. It was cheaper and easier to get a loan this time last year. Your points are well taken though. It ain’t easy to get financing for anything resembling a home in the traditional areas of San Francisco.
The funny thing is that when buyers are forced to put real % money down — they become surprisingly realistic about the potential to lose their “investment”. It’s a noticeable shift away from the F’it borrowing mentality of the previous 4 years!
I am curious to see how many buyers have 200k-500k to put down on a house.
“I asked the lenders to assume we were talking about a loan of around $1 million on a primary residence worth $1.2 to $1.5 million.”
Maybe I am wrong but there aren’t that many people left from the stock market who have that type of cash.
asad: I’d think anyone who purchased in the last 3 to 5 years would have the hardest time coming up with 20% down. They can’t borrow against their house or get a LOC because thier equity has vanished. Selling in this market isn’t an attractive idea either to raise money.
First time home buyers can use FHA loans at 3.5% but IIRC they are limited to around $625k loan limit, so that prices most of SF out of the pictures.
I think all it leaves is people with enough credit left either through existing homes they own, stocks investments or borrowing against their 401k to gather enough funds for a down payment. So yeah… I’m with you, where do normal everyday folks get that kind of cash. It’s funny though I can hear my fathers voice saying ‘In my day everyone had to save 20%!’ seems like such a far away concept these days to actually have to save.
It would also include people who rented for the past 3 to 5 years because it was so much cheaper than buying, and saved their money.
Of course, those people thought prices were too high in 03, thought they were *really* too high in 05, found them too high in 07, and remain too high in ’08. SF prices have not budged.
Median single family home prices in November were
$751,000 and the average was $1,013,688 — this from actual sales recorded in the SF MLS, not Altos Research (sidebar) blended sales/projections methodology. I’d venture to say that if you take out the outlying MLS Districts (3 and 10), the median and average would be substantially higher. (I have a graph showing median price by district through September on my blog, here: http://www.pegasusventures.net/wordpressblog/2008/10/20/what-on-earth-does-this-chart-mean-click-to-make-it-bigger/#more-27).
The fact is that buying a home or a condo is still bloody expensive in this town and is always likely to be. There are simply enough people who are wealthy enough to buy, and the housing stock in this town aint getting any bigger. When I talked to the loan officers, I wanted to get a realistic view for my clients. That’s why I picked the 1.2 to 1.5 million range. I would add, however, that the interest rate picture is substantially better for loans under the conforming amount of $625,500.
Eddy, on loans being “near historical lows”, I stand by that comment. You’re absolutely right, of course, about them being much harder to get. For a great chart on mortgage rates over time, check this out: http://mortgage-x.com/trends.htm
(The last chart goes back to 1963).