Why would a homeowner want to trade in their home loan that has a 3.25% fixed interest rate for 4.625% mortgage?
With that being said this appears to be a time when consumers will seek home equity mortgages. And that is why a 2nd mortgage is so appealing to people that need cash for house repairs or need relief by consolidating credit cards into an affordable mortgage. Not to mention 2nd mortgages and home equity lines of credit are tax deductible in most cases.
Frequently Asked Questions About Second Mortgages
Can I qualify for a 2nd mortgage if I have poor credit? Credit is a subjective term, so it depends on how you define “poor credit.” It is important to realize that if you have low fico scores then you will other compensating factors. Foe example, if you have a 580 credit score but you have a verifiable income a low debt ratio and more than 25% equity, then you may be eligible for a sub-prime home equity loan from a private lender. If you have a really bad credit score but have more than 30% income, you may qualify for a hard money 2nd mortgage.
How much equity do I need to qualify for a second mortgage? Over the last few decades people with good credit scores (above 680) could borrow an additional 25% equity beyond what their house was appraised for. Of course the borrower needed to supply the lender with complete income documentation and the debt to income ratio typically needed to remain below 45%.
What is the difference between an equity line of credit and a 2nd mortgage? Technically an equity line of credit is a second mortgage, but in this context most lenders are defining a home equity line of credit as revolving credit that the borrower pays interest only on the portion they use. Usually a credit line or “HELOC” is set with an adjustable interest rate that can change annually. These are very popular with homeowners that are financing house improvements and construction in which the funds will be used over-time. A “2nd mortgage” is typically referred to as an installment loan in which all of the money is extended to the borrower up-front. These typically carry a fixed interest rate for a specific period ranging from 10 to 30-years. Homeowners who are consolidating debt or variable rate loans should choose a second mortgage with a fixed rate so they know exactly what their monthly payment will be.
Will the Purchase Market Heat Up Again in 2014?
Home buying is more aggressive with credit for first time house buyers that seek FHA mortgage products. Of course borrowers will have to pay the upfront costs as well as monthly mortgage insurance. But many new home buyers simply see the down-payment and mortgage insurance as a trade-off to become a homeowner while house prices are still relatively low. The idea is for these borrowers buying real estate insured by FHA to earn equity quick when the market surges so they can refinance into a home loan that does not require mortgage insurance. Will that happen soon? Nobody knows but it appears the Federal Reserve will keep the rates artificially low at least through 2016. Read FHA Home Loans Programs Safe
Get a Second Chance with FHA Home Buyer Loans for People with a Bad Credit History
People that have the ability to document the income dip, job loss or reduced business income now would be required to document 1 year with on-time housing and credit-card payments prior to applying to finance a house with a FHA home purchase loan. In a recent HUD bulletin, the Federal Housing Administration introduced this aggressive FHA home buyers loans.
FHA also mandated that borrowers interested in this bad credit FHA mortgage must attend house counseling from an approved agency outlined by HUD. In the past, people were not eligible for a FHA mortgage programs for 3-years after a home foreclosure or 2-years after a chapter 7 or 13 bankruptcy.
Other Lending Highlights
In a recent interview, FHA Commissioner Carol Galante said, “What we’ve did here is to say, ‘Let’s look at the Great Recession and financial crisis with that lens,’” Galante said. “We want to recognize and distinguish between Americans hindered by that very serious circumstance beyond their control versus borrowers that may have run into problems because they maxed out their charge cards and fell behind on their payments.” As the economy started getting better we were hearing about more and more people whose access to credit moving forward was being stifled by the situation the country has been through,”
Many people in the industry had been anticipating that HUD and Congress would tighten guidelines more because of the low reserves and increased delinquencies, so this announcement of expanding guidelines for FHA mortgages for people with bad credit. Many lenders and brokers believed that HUD would raise the 500 minimum credit score requirement as well as increase the down-payment requirement from 3.5% to 5%., so the fact that this isn’t happening is great news for loan originators and home buyers nationally. Read the original LA Times Article.
I asked a few seasoned loan veterans how this could be. There theory is that many homeowners are not aware that they are eligible for no equity home refinancing. Despite massive marketing campaigns on radio, television and direct mail, many homeowners are simply out of the loop. The HARP 2.0 will not last forever, so hopefully these homeowners will be reached so that they can realize the benefits of refinancing underwater loans. If you are a homeowner that closed your last home loan prior to June 1, 2009 and your mortgage is owned by Fannie Mae or Freddie Mac, you may be eligible for underwater mortgage refinancing.
- How do I get approved with bad credit mortgage lenders? We see thousands of borrowers that need a mortgage but happen to have credit scores below the threshold that today’s conventional lenders are seeking. With that being said, many people with low fico scores are migrating towards government loans, because they have more flexible guidelines with respect to credit. FHA still accepts borrowers with credit scores as low as 500 and VA still has no minimum credit scores in their guidelines for buying or refinancing. That doesn’t mean that government lenders are looking to approve people with poor credit, but underwriters can and do make exceptions when borrowers have compensating factors.
- Can I get a home loan with no down payment? Yes 100% home loans that require zero down-payment are available to people who meet the criteria of USDA and VA mortgage programs. The USDA is a loan reserved primarily for people that are buying or refinancing in a rural region of the country. The VA mortgage is a program designed for military borrowers and retired veterans. Both loan programs require nothing down and the interest rates are competitive.
- Do stated Income mortgage loans exist? Yes and No. Hard money and subprime lenders still offer “stated income loans.” In wake of the recent housing crisis, conventional and government lenders state that they do not allow stated or no income documentation loans. They require full documentation with their purchase and refinance programs. However, the “streamline” program which is endorsed by FHA and VA does not require pay-stubs, W2’s or verification of income from the borrower’s employer. They do in fact do a verification of employment in an effort to verify that the borrower still has a job. So in a sense, the government programs still allow stated income mortgages to borrowers that already have an existing mortgage with either FHA or VA. No cash out is allowed with the streamline either.
What Causes Mortgage Rates to Fall?
Bond Market: When the bond market gets battered in most cases home loan rates will rise. Specifically, when the 10-year bond worsens usually the pricing on the 30-year mortgage rates worsens as well. Home loan refinancing becomes more active when the bond market improves.
Economy: Typically bad news in the U.S economy is good news for the mortgage market. When the unemployment ticks up, rates often tick down. When the GDP comes in lower than expected, rates on home loans may decline as well.
Federal Reserve: When the Fed commits to increasing the purchasing of mortgage bonds then rates tend to improve. When the Federal Reserve instructs Congress to bail out Fannie Mae and Freddie Mac then the mortgage market rallies favorably. When the U.S government pushes quantitative easing, ie. QE3, the bond market reacts and home loan rates drop to the benefits of consumers.
Many Borrowers Are Scrambling to Lock their Mortgage Rate
Purchase loan inquiries have accounted for nearly 20% of total applications. The report also revealed that HARP loans may be driving 25% of total volume of home refinancing applications. Nationwide mortgage lenders have confirmed that rates have been higher and pricing had worsened. Most loan officers are locking loans and not taking chances on the market recovering.
The rates on 30-year mortgages averaged 3.4% paying a little more than half a percent for origination and the rates on the 15-year averaged 2.625% paying .7% for lending costs. We noticed a spike in inquiries for people looking to refinance with one of the hybrid ARMs like the 5/1 and 7/1 loans because they provided affordability and security for 5 or 7 years. We anticipate rates to stay steady for the next few weeks. If the debt ceiling deal goes sour than we may see another dip in rates but do not count on it.