As Interest Rates Rise, Lenders Offer Creative Mortgages, Incentives – Orange County Register
A combination of post-pandemic cabin fever and a 75% reduction in new mortgage applications has left thousands of Southern California mortgage originators with nothing but free time at the recent California Mortgage Expo in Irvine.
It was so surreal, I felt like I was part of an anthill.
Of all the people and speakers, I was struck by how creative and aggressive lenders have become in solving the income puzzle for homebuyers. The median home price in the area has risen by $105,000, or nearly 17%, since March 2021. And mortgage payments have also risen steadily, hitting a record high of $2,738 for the median home price of 735,000 $. This is an increase of 8.8% in one month and 31% in one year.
As Freddie Mac fixed mortgage rates climbed to 5.3% on May 12 from 3.22% in early January, rate cut refinancing has all but disappeared. While the Mortgage Bankers Association is reporting an increase in application volume, I suspect there are many pre-approved homebuyers who still can’t get a deal, and many mortgage borrowers aren’t getting anywhere fast.
Here are some of the alternative mortgages and incentive lenders shared at the exhibit…
Admittedly, the most aggressive loan program I encountered was a way for self-employed borrowers to qualify by using the last three months of business or personal bank account statements to qualify. The program adds up three months of deposits, including transfers from other accounts, and divides that by three.
Barring a good CPA letter explaining the drop in business expenses, most business owners will need to take a 50% discount to cover overhead – if you’re using business bank statements. For example, let’s say your last three months of business deposits and transfers totaled $300,000. Take 50% of that ($150,000) and divide by three months. Qualifying income reaches a generous $50,000 per month.
This loan only works for the purchase or refinance of a single owner-occupied home with loan amounts up to $3 million. The rates are between 6% and 7%. Ouch.
In another example, a lender allows income qualifications based on liquid assets.
Let’s say you have $1 million between your bank account and your stock market holdings. Divide that by three years and you get an annual income of $333,333. The maximum loan amount on this transaction is $4 million with interest rates ranging from 6.5% to 8.5%.
Perhaps the main difference between today and the mortgage meltdown of yesteryear is that this lender requires 30% equity or down payment. Back then, there were wild loans with little or no down payment.
And who said you need your own money to buy rental properties? One program I came across allows 100% donation funds (say mom gives you a wad of cash) with a FICO score as low as 620. Can you say straw buyer?
Mortgage originators are also continually pressured by real estate agents to close quickly in order to help their buyers.
A lender offering a fast-closing guarantee caught the eye of Lake Forest-based participant and mortgage originator Ed Personius.
“We can offer (the lender) a $2,500 guarantee that the purchase will close within a quick 15 days,” Personius said. In other words, if the lender has everything they need up front but can’t close within 15 days, they’ll give the buyer $2,500 credit at closing.
By moving toward vacation investment properties, a lender made it easier to qualify for a purchase or refinance by using average vacation rents instead of average neighborhood rents.
Let’s say the vacation rental income is twice the annual income of a long-term renter. For example, $100,000 per year (vacation) versus $50,000 (yearly tenant). You can use 80% of this average vacation rental income ($80,000) to earn qualifying income, instead of using $50,000.
Are you interested in financing an area with a house or without a house on the property? How about a wine estate? Or a farm? House hidden on a huge plot? All it takes is a 30% down payment with a lender. With few exceptions, most conventional mortgage lenders are reluctant to lend on parcels where most of the value is in the land.
Build from scratch? There is a construction loan available for a buyer contributing as little as 15% of the completed value. If the appraiser concludes that the final value will be $1 million, your investment is $150,000.
The offers also included instant home insurance quotes. An online seller was offering 20% off the first year owner’s premium. The system claims to print proof of insurance in minutes. Not bad, especially for first-time buyers who may not have an agent.
How busy was the exhibition?
“There were just under 2,000 attendees,” said Vincent Valvo, CEO of American Business Media, organizer of the Connect expo. “Non-QM (exotic mortgages) were the hot topic.”
For better or worse, walking away after the show made me think that pretty much anyone can be financed if they have decent credit and a 20% down payment.
Freddie Mac Rate News
The 30-year fixed rate averaged 5.3%, three basis points higher than last week. The 15-year fixed rate averaged 4.48%, four basis points lower than last week. The 5-year ARM averaged 3.98%, two basis points higher than last week.
The Mortgage Bankers Association reported a 2% increase in mortgage application volume from the previous week.
At the end of the line : Assuming a borrower receives the average 30-year fixed rate on a conforming loan of $647,200, last year’s payment was $886 less than this week’s payment of $3,594.
What I see: Locally, well-qualified borrowers can obtain the following fixed rate mortgages without points: A 30-year FHA at 4.625%, a 15-year conventional at 4.375%, a 30-year conventional at 5.125%, a balance (647,201 $ to $970,800) at 5.375%, a conventional 30-year high balance at 5.375%, and a 30-year jumbo buy, pegged at 5%.
To note: The 30-year FHA-compliant loan is limited to loans of $562,350 in the Inland Empire and $647,200 in LA and Orange counties.
Eye-Catching Loan Program of the Week: A jumbo 30-year adjustable mortgage, locked in for the first five years at 3.75% with 1 point.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or [email protected] His website is www.mortgagegrader.com.