Question: Bob, I keep hearing how hard it is and ways to help young buyers get that property/home. What about us older/senior citizens having a problem? Please address/advise us on some ways of help when we don't fit into the traditional lending bracket. With the way property values in Cape Coral/Fort Myers have risen, a lot of us "baby boomers" and older have to change our way of thinking when buying a home and don't want to cut our life styles a lot. Help!
- Fred & Joan C.
Answer: Wow! Fred, this is the first time I have been approached or received a letter from someone asking me to address this issue. This deserved some research and hopefully your answer.
Young first-time home buyers with little or no money for a down payment are not the only consumers chasing the dream of homeownership. Older folks have dreams to, and some of them are starting over in new areas, with new partners and a part-time job.
These people understand the upside of home appreciation and have adopted the mindset to do what it takes to begin accruing equity. But they do not fit seamlessly into the conventional lending bracket (as mentioned in the question) "conforming" mortgages, and sometimes are forced to pay high rates and fees in the sub-prime market. If savings are not the challenge, then there are often issues with monthly income cash flow or poor credit.
Retirees, Bill and Sherry M., both on fixed incomes, were recently married. They had no significant funds for a down payment, yet wanted to buy a home in Cape Coral before the prices got any higher.
The couple did not want a long-term loan with a higher interest rate, so the found a program with a two-year loan at a fixes rate about 3.5 percentage points higher than the 30-year fixed rate. However the loan allowed them to refinance at a lower rate in 24 months, after they had built up equity. Two years later, even though they had some credit issues, they refinanced into a long-term, fixed-rate loan very close to the market rate.
For many borrowers, there is nothing "sub" about sub-prime. It is simply there only way to purchase a home. What gives the sub-prime loan industry a bad name often are the lenders offering down-and-out consumers open-end deals with astronomical rates and fees. Some of these loans include hooks that keep the consumer/customer in the mortgage for years. A not-so-recent case was the $484 million settlement reached between Illinois-based Household International and the attorneys general in all 50 states in 2003 to settle several pending lawsuits involving alleged predatory lending practices.
The mortgage game is all about risk and return. Conforming lenders typically abide by the terms and conditions set by the secondary market.
A lender will often give the borrower a certain amount of leeway, such as higher debt to income ratios, if the lender is keeping the loan.
However, many lenders will not stray far from the norm, allowing them the flexibility of them selling the loan down the road.
Unscrupulous players who have taken advantage of borrowers unfamiliar with the mortgage process have damaged other lenders, especially those dealing in the sub-prime market. These borrowers, usually seniors and immigrants, qualified for better rates and fees than they received but did not understand what they were signing.
Bait-and-switch stories often surface, and language challenges also have been a problem. A lender would offer a credit-poor borrower a "rate reduction loan" at higher than the market rate to consolidate the first mortgage and outstanding consumer or credit card debt, stating the borrower could not qualify for a better rate because of a blemished credit history. Later in the process, the lender informs the borrower that the house did not appraise at an amount large enough to justify the loan. The lender would then grant the borrower a second a second mortgage, sometimes at a rate greater than 17-20 percent.
If you are applying for a loan, ask friends and neighbors what companies they would recommend. Conform-ing or nonconforming, some places are better to work with than others. You asked me for a list of my recommendations, however I cannot play favorites in my column.
Q: Bob, We are going to get a loan for a home. The interest rates may go up or down and I'm not a very good risk taker, but like everyone, I want the best deal. Any suggestions?
- Marvin B.
A: When you finally locate that dream house (and in this market it is very likely, the last four+ years real estate has dropped), the next major hurdle you'll will face is arranging suitable mortgage financing.
Obviously, you'll want to get the lowest rate possible, and, you're risk adverse, you'll also probably want to make sure you get the rate "locked in," or guaranteed.
Keep in mind that a lock-in or loan rate guarantee is a written contract. If the terms are not clearly spelled out and signed by both you and the lender, the contract won't be enforceable. It's also important to bear in mind that many lock-ins include other conditions, such as a time limit on the guaranteed rate and "up-payment of a nonrefundable" fee. The agreement should also spell out the number of "points" you'll be required to pay at closing time. (Each point equals 1 percent of the amount to be mortgaged, not the cost of the home). What happens if the rate you lock-in is, say 5 percent, and the rate goes down (as they are now) and that rate goes down to say 4 1/4 percent? Usually, though not necessarily always, you're stuck with your lock-in rate.
The best advice: if you think rates will go up before you can close on your mortgage loan or if you're risk adverse, then by all means you should consider locking in the current rate. However, the way rates are coming down, things should prove interesting. Between the stock market, inflation and the oil struggles, etc., hopefully the interest rates will go down or at least stay at their fantastic rate as of now.
Keep your fingers crossed and good luck!
Have a real estate question? Write, call, fax or e-mail:
Bob Jeffries, Realtor,
Century 21 Birchwood Realty, Inc.
4040 Del Prado Blvd., Cape Coral, FL