Buying St. Louis Real Estate?? Shopping for a Loan?? Read This First!!

Are you planning to buy St. Louis Real Estate and need a mortgage??

We’ve all seen the advertisements on television, in newspapers, on the radio and many other advertising mediums telling us that you can purchase real estate with a multiple of “creative financing” options:

1. No money down; 100% financing

2. Below market interest rates

3. Interest only loans

4. Adjustable rate loans (Adjustable Rate Mortgage)

5. Loans in which you, the buyer, can determine your monthly payment.

Over the last several years, these options have been readily available to real estate consumers who are chasing the “American Dream“-Home Ownership.

Real Estate consumers with good to excellent credit ( scores of 580-850), have available to them “prime”, or A paper loans. These are conventional loans made by the lender backed by the real estate purchased as collateral for the loan. These loans are made to the real estate consumer in three forms:

1. Full Documentation: a credit report, employment verification, salary verification, all debts and assets verified. All this information is documented by the lender. This is the most secure form of qualification and loan.

2. Stated Documentation: a credit report, two years tax returns including revenue and expense reports (schedule C, where applicable.), debt and asset verification. This is still a good risk for the lender, based on the credit score.

3. No Documentation: a credit report is run and that is it. No other documentation is compiled by the lender. This is the riskiest type of loan, but again, a good to excellent credit score and the real estate purchased functions as the security for the loan.

Interest rates for these loans will vary, depending upon the increase of risk associated with them. A Full Documentation loan will carry a lower interest rate than a Stated Doc loan. A No Documentation loan will undoubtedly carry an interest rate higher than the Full Doc or Stated Doc loan.

Real Estate consumers with questionable credit (scores of 300-580), bad debts, bankruptcy, divorce issues, or various other issues, could fall into the sub-prime lending market. This is the riskiest part of the lending market, and as such higher interest rates and more “creative financing options” appear. The three types of loans previously mentioned used to be available to sub-prime borrowers, but with interest rates rising, borrowers income dropping and housing pricing falling, some of these options are becoming extinct.

In the sub-prime market, Full Doc loans are still available with initial investments (down payment) ranging from 0% to 20%. Obviously, the greater the initial investment, the better the underwriters like the loan, but interest rates will still be slightly higher than a prime A paper loan.

Stated Doc loans in the sub-prime market are still available with a 5% to 20% initial investment, but the days of a 0% down payment with a Stated Doc loan are gone.

No Doc loans in the sub-prime market is the one area that has dried up. Investors and lenders are unwilling to take these kind of risks without a much higher rate of return (interest rate) and consequently, that means interest rates that are unacceptable to buyers.

Since late 2006, we have seen 56 sub-prime lenders cease business operations. Some of these have disappeared completely, others are sub-operations of larger lending institutions that have shut down the sub-prime part of their business. Most of these sub-prime lenders were merely “pass-through” lenders. Pass-Through lenders are businesses that act as the “middle-man” between the mortgage broker and the larger lending institutions, such as Wells Fargo and CountryWide who in turn, sell their loans in packaged bundles to Wall Street.

As mentioned previously, with interest rates rising, borrowers income dropping and housing pricing falling, investors are demanding a greater return on their investment in sub-prime securities. Demanding higher returns puts pressure on the lenders to charge higher interest rates for these types of loans to the consumer, who in turn will experience a much higher mortgage payment. This scenario has led to the investor’s and lenders fear of mortgage defaults throughout the sub-prime market.

Interest-Only loans are another SCARY loan program. It’s not for everyone and carries with it HUGE surprises for the borrower, if not completely educated in the program’s details. These loans allow a borrower to pay interest charges only on a loan for a specified period of time, usually one to three years. At the conclusion of the one to three years, the borrower has a couple options;

1. Pay a lump sum equal to the total principle payments that were unpaid during the one to three years of interest only. This “catches up” the mortgage and from that time forward, the borrower pays the usual monthly principle and interest payment each month as a regular conventional mortgage.

2. If the interest only mortgage was done as an ARM, the borrower will usually have to refinance at the end of the interest-only period and risks a higher interest rate, and consequently a much higher monthly mortgage payment going forward. This is the situation that puts borrowers on the road to foreclosure.

These scenarios make sense only for borrowers who KNOW in that one to three year period, they will experience a major increase in income, or other financial circumstances change that allow them to pay the increased mortgage payments.

SO…To all the potential buyers chasing the American Dream of Home Ownership–Due Diligence is the answer!!

Shop lenders; compare programs and interest rates. Become familiar with the loan program you are anticipating using. Know how the program will operate into the future of the loan.

Check out www.mortgageimplode.com. It’s an abundance of useful information on the state of the lending industry

ASK LOTS of Questions

What loan programs are available?

What is the interest rate?

What fees are associated with the loan program?

Who services my loan? (local or is loan sold to another lender?)

Is there a cap on the interest rate (If Adjustable Rate Mortgage)?

Are there pre-payment penalties if the loan is paid off ahead of maturity date?

This whole thing goes back to the basics. With proper due diligence by the consumer, responsible practices by the lending institutions and responsible advice from the real estate professionals, home ownership will be much less of a risk to all parties.

This entry was posted on Tuesday, April 17th, 2007 at 12:20 pm and is filed under First Time Home Buyer, For Buyers, Mortgage News, Real Estate News, Relocation Buyer. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.