Okay, now I’m starting to worry. Two subprime mortage lenders closed shop in the last week. Word is that it’s going to be harder to get a mortgage. And this is occurring just about the time I am finally going to be able to buy a condo or a townhouse of my very own.
The on-staff track continues apace, and odds are very high I will be a member of Northern Virginia Company in a matter of weeks. I am paying down the debt that I accrued from, well, living while unemployed and underemployed. I wish I could tell you that my credit debt has at least some very cool toys to show for it, but I’m still watching TV on my ten-year-old Panasonic 36-inch TV that’s been repaired once by Panasonic (warranty) and once by a repairman. The laptop I own was effectively given me by my mother, who came into a little money three years ago. My biggest non-essential item expenditure in the last few years was my new digital camera, and you know, I deserved it.
So I’m paying down debt, and that will continue until sometime next year. Then I’ll finally be able to start saving money towards a down payment. I don’t think I’ll be able to swing more than ten percent, what with the lack of savings right now, unless the last of my tech stocks suddenly goes back up to what it was worth when I bought it. And in spite of all the debt and under- and unemployment, my credit record is quite good. I almost never paid late on the bills that count you late if you’re a second overdue (e.g., credit cards), and when I did, I made sure to get the late fee and mark stricken from the record. (It’s a simple phone call, and if you have no late payments in the last six months, they’ll waive the fee.) Last month, I visited a local company that’s building townhouses in my neighborhood (and which is probably part of the subprime problem, because they wanted me to sign on the dotted line right then and there, my credit was good, honest!), and had them check my credit score. It’s high enough that I don’t have to worry about getting a mortgage, they said.
But here’s what I am worried about: How many more lenders are going to go belly-up, and how much harder will that make it for me to get a mortgage loan? That, and how high the interest rates will go, are starting to make me worry quite a bit.
So, finance people: Is it time to worry yet? Or should I just continue with what I’m doing and see where things are six months from now, when I was planning on getting serious about shopping for a home? Because if this keeps up, I’m going to have to move out to the sticks if I want to own something, and, well, I hate the sticks. No offense to people who live there, but I’m a city girl, more or less.
Meryl;
I’m not a finance person, but I do read a bit about the subject. Here’s my take on it: stick with your plan.
Mortgage lenders make their money by, well, lending out money. So they HAVE to do so if they want to stay in business. Having made a significant number of bad decisions these past years, they are going to show a bit greater care in the future. It sounds like your plan will put you in the position of being one of the “good choices” for a loan.
10% down? Heaven to the lenders these days, since most of the ones who are losing their shirts made zero down, interest only loans. Not something a rational person would do.
And as the “sub-prime” loans continue to falter, the price of real estate should come down, which would be to your benefit.
Save your money and pay your bills; that will maximize your credit score, and when you find the right place, you’ll be in a position to negotiate on favorable terms.
I’m not a finance person either — well, I do have some friends who teach me a lot.
And Mr. Tom Frank is right-on. 100%. Read your above post in two months, just after your moving party has left you with a roomful of boxes.
This is the best time to buy, remember that when you look. This is the very best time to be a buyer in about 20 years.
But don’t bother mentioning that to your broker — they’ll already be very happy to write you a mortgage, so happy they won’t try any hard ball tactics. Why do I think this? Because you are an excellent mortgage prospect and they know that if they upset you, you’ll look elsewhere, they simply won’t risk losing you business.
Well, it’s not all bad. The harder it is for people to get mortgages, the fewer people will be buying houses. The less demand for houses, the lower the prices. The key is catching the market when house price + mortgage interest = affordable.
Oh yeah, our society has names for people like you.
Frugal. Prudent.
I heard that the subprime problem will make it hard and expensive for people with bad credit to get loans, but it should create no problems for people with good credit.
I’m in a similar situation with regard to trying to get a mortgage loan for a new purchase right now, and one of my best friends recently purchased a townhouse out past Herndon, so I feel decently equipped to give some anecdotal advice despite not being a finance geek at all.
1) Everyone above who says this is a good time to buy is right. That would be wrong about Manhattan, but is very on target for Northern Virginia if you’re looking at the outer suburbs. You’d really be in clover if you were buying a used McMansion, but even smaller residences are at good prices because there’s been such a ridiculous amount of new construction out there that it affects the whole market.
2) Slightly contrary to what others have said: People might try hardball tactics if they think they can get away with it. I made the mistake of using a “mortgage broker,” i.e. a guy I paid to shop around for mortgages and supposedly take care of things. I engaged him before the full impact of the subprime mess hit. After never giving me much of an estimate on what my interest rate would be, I suddenly found out over this past weekend that it would be 7.625%. (For your reference, that’s too high.) At first I thought, well, hell, I’m stuck with it. But then I talked with my sisters, each of whom also is in the home-purchase stage of life, and they’d both gotten much better rates. So I tried their lender and quickly got a 6.25% percent quote for half the loan and 6.75% for the remainder. I forwarded that message to my broker and what do you know — he’s suddenly trying much harder to get a lower rate and a bigger variety of options.
So make the lenders compete for your money, but in order to do that, don’t do anything that would abbreviate the amount of time you have to get lots of quotes and throw them in the other guys’ faces to start a bidding war for your loan. I’ve painted myself into something of a corner by setting an early closing date, so I really need this broker to want to undercut the other guys.
At least among the lenders I’ve been checking out, all are substantial banking institutions that are not invested solely in residential real estate, so those aren’t going anywhere even if the subprime mess deepens. Be sure to check those out, not just the traditional lenders that target real estate.
Paying down credit card debt is very smart because lenders look unfavorably upon it, though don’t necessarily go overboard with it. For example, if you’re getting a crazy good rate on a particular loan (e.g., 3%), use the money that otherwise would go to paying off the debt to invest. Almost anything will yield a higher rate of return than that interest rate.
If necessary to reassure yourself when anyone attempts hardball, chant in front of the mirror, “I’m stable enough, credit-worthy enough, and gosh darn it, people should give me a good interest rate.”
Good luck!
I’m not a finance geek, but I can tell you that between now and 2009 is a good time to buy. Why? Buyer’s Market. That’s why. The price of houses are dropping faster than that tech stock you bought rigth before the Tech Bubble Burst in 2000. I’d wait long enough for their to be a real meltdown in housing prices, and then buy low. Drive a hard bargain, because there are loads of foreclosed houses that banks want to get rid of. It’s going to get worse before it gets better.
All the above sounds good in terms of the real estate market.
But when it comes to mortgages the magic number is 416,999. As long as you are under $417,000 you will fall into a more favorable group of loans, conforming vs. jumbo loans. Conforming loans are bundled by Fannie Mae and Freddie Mac and sold as securities — this means that they are much easier to get money for from the lender’s end and usually have a slightly lower interest rate because of that.
All in all the comment about how lenders make money is correct and the competition should keep rates down, especially as borrowers get scarcer due to those who got hurt most by the sub-prime mess leaving the mortgage market. I am not an expert on these things but I wouldn’t panic just yet — the Fed just pumped a lot of liquid money back into the market so las long as you have good credit you should be ok.
Nature abhors a vacuum. So do Markets. Besides, this “news” is coming from the same people that brought you Y2K, Global Warming, and oh, yes, anti-Israel bias.
Robert
A couple of people who *are* finance geeks…specically, mortgage finance geeks…have a blog here. It’s useful reading for anyone who really wants to understand the dynamics of the mortgage market in depth.
And they even have a relevant rock song of the week, every Saturday!
Thanks, folks.
Matt, $417k is way out of my budget, so I fall within the magic number.
David, thanks. I’ll go check out that blog.
Meryl;
A couple of other thoughts for you. If your new employer happens to have a credit union, or relations with one, join it.
CU’s are really good about mortgages to members, and if you’ve been a member for 6 months or so, they’ll know you as a financially stable person. CU’s also don’t always sell their mortgages on the secondary market, which, while of little real consequence to the home owner, just feels nice.
When you do finally get the mortgage, if your finanical state permits, consider a 15 year conventional, paid bi-weekly (assuming your employer pays you bi-weekly, this is really easy to deal with). That results in the note being paid off in roughly 12 years, which (if I’ve read you correctly) should be just before the point where you’ll be eligible for retirement. Nice to have the house all paid for when you become eligible for social security/medicare/medicaid, even if you do keep working (I expect to, as long as I stay healthy).
I should point out that you should make sure that you can “prepay” your mortgage. That is, instead of paying the exact calculated amount every month, try to pay something over against the principal. The reason is that the first payments are mainly interest and only towards the end do you start really paying down the principal. For example, one extra payment at the beginning, subtracts much more than one payment at the end.
When I first started, I rounding up my payment to an even $100 figure (when I couldn’t afford much more than the exact payment). That reduced the time by a much larger amount than it seemed.
First of all, there will always be banks willing to lend, if you qualify. Qualification is going to be a function of your credit rating, your annual income, any other outstanding debts (whether or not they’re paid on-time), and the size of the mortgage (both in absolute terms and relative to the value of the house.)
In general, if your credit history is good and your income is high enough to make the payments, you should be able to get a mortgage. The current downturn make force you into a higher interest rate than last year, but it shouldn’t be much worse than that. In a few years, if rates go down, you can always refinance at that point.
Some advice:
1: Always go to a bank, not a mortgage company. And preferably a bank with a good reputation. My parents got a loan from a mortgage company at one point and it was a disaster. The mortgage was sold from company-to-company every six months, making a total mess with payment processing, escrow processing, taxes, etc. The confusion created some colossal screwups (like using our escrow to pay someone else’s property tax.) When I bought my house, I got the mortgage from Chase Manhattan and there has never been a problem.
2: Fixed-rate mortgages only. Never use an ARM unless you plan on dumping the house in a year or two. The rates will always end up adjusting to something unbearably painful – which is part of the reason for the current crisis. I would recommend a 30-year fixed-rate mortgage. Some people will recommend 15-year, if you can afford it, but I don’t.
3: If you can scrounge together enough money for a 20% down payment, that’s best. Banks will love you if you can do that. If you can’t put down 20%, you’ll probably be required to buy Private Mortgage Insurance (PMI) to cover the bank’s loss if you default and they can’t sell the house for the amount outstanding on the loan.
4: In some cases, if your credit is especially good, the banks might be willing to get creative to avoid PMI. When I got my house, they arranged an 80-10-10 deal, where I got a mortgage for 80%, a simultaneous home equity loan for 10%, and a 10% down payment. The equity-loan portion had a much higher interest rate (8-3/8% vs 6-3/8% on the first mortgage), but I was able to pay it off in four years, rather than over it’s 15-year schedule, so the overall impact wasn’t that bad.
5: When shopping for a house, it is always a good idea to get a pre-approved loan. Pre-approval (not pre-qualified!) means the bank goes through all their financial analysis and doesn’t just take a quick look at your credit record. If you go to a seller with a pre-approval, it is equivalent to a cash-sale, since they don’t have to worry about your ability to get a loan. This gives you a huge advantage over other buyers. (I did this when I bought my house, and beat out three other people who offered more money but were not pre-approved.)
Yes, it will be harder to get a mortgage because 1) lenders are going to over-react for a little while and 2) it’s going to be harder for lenders to raise money to keep lending volumes up until it gets easy to sell the debt out the back end on the securitization markets. The days of lending from the capital base are over, so as long as liquidity on the capital markets is a problem, lending criteria are going to be tight.
Someone told you to only get a fixed mortgage – and at least a 15-year fix at that! I think that’s bad advice. We’re near the top of a tightening cycle, so fixing now means you’ll probably pay a higher rate than the average variable over the life of the loan. Interest rates aren’t like they used to be. I simply can’t foresee any circumstances that will push the base rate higher than 7% – barring an economic catastrophe – and most likely there’s going to be a series of cuts sometime in the next few years.
http://www.jpost.com/servlet/Satellite?cid=1188197173584&pagename=JPost%2FJPArticle%2FShowFull
excerpt:
Lacker also predicted “the drag from housing will continue for some time.” Economists agree the glut of unsold properties is unlikely to ease anytime soon, and will put pressure on prices to fall further. Prospective homebuyers are waiting for better bargains, while subprime defaults and rising foreclosures raise the risk that more houses will get thrown back on the market.