Rising mortgage rates might seem like nothing but bad news for those in the market to buy a home. But there may be a silver lining for consumers: When rates change in either direction, many lenders change their product lines.
Lenders typically offer two types of mortgages: a purchase-money mortgage, to be used to buy a home, and a refinance mortgage when rates decline. When rates go up, refinance transactions go down -- why would anyone refi into a higher rate? -- and lenders must replace that lost business.
One way lenders do that is by turning to what’s known as “alternative mortgage” products. And that can be to your benefit.
Today, there are several more products available that might better fit a borrower’s circumstances. And there may be more robust competition among lenders as they beg for your business.
At the recent regional conference of mortgage bankers in Atlantic City, New Jersey, several hundred lenders from the New England and Middle Atlantic states kicked the tires on several alternative products. Those included rehabilitation loans, affordable lending mortgages and so-called “Alt-A” loans -- ones which, for one reason or another, don’t fit into the bucket of products that can be purchased from primary lenders by the federal mortgage agencies (Fannie Mae, Freddie Mac and Ginnie Mae).
It’s worth noting that lenders maintain none of the new variety of alternative loans should be called “subprime,” at least not as they pertain to the poorly underwritten mortgages that exploded a decade ago, resulting in a foreclosure crisis that all but destroyed the national economy.
Today’s non-prime loans have to pass federal underwriting standards put into place to prevent another disaster, specifically the “ability to repay” rule mandated by the Consumer Financial Protection Bureau (CFPB). Simply put, lenders must determine that borrowers have not just the desire to make their payments, but the ability to do so.
(Column intermission: It will be interesting to see if the “ability to repay” rule is swept away by a Trump administration that has little affinity for the CFPB or “unnecessary” regulations placed upon financial institutions.)
One segment of the market in which lenders are starting to exhibit more interest is one where borrowers put up a minimal amount of money out of pocket. These “3 percent down” programs have been around for some time. But with lenders salivating over easy-to-originate refis, they had little time to bother with these paperwork-intensive loans.
Now, with little to no refi business to speak of, they are turning to programs such as HomeReady and Home Possible from Fannie Mae and Freddie Mac, respectively.
Loans like these were designed to expand the mortgage market, especially for low- and moderate-income borrowers who have trouble scraping up enough money for a conventional down payment. In some cases, borrowers may even be able to use money from other sources to help defer the costs of closing charges and fees.
When Home Possible and HomeReady were rolled out almost two years ago, many lenders turned up their noses at them as just two more affordable-housing programs. But now that they are looking for ways to offset lost business, they have discovered the programs have some interesting bells and whistles.
For example, borrowers no longer need to be first-time homebuyers. But best of all, rates are lower than those that Fannie and Freddie charge on their top-tier mortgages.
Another product likely to see increased attention is the Federal Housing Administration’s 203(k) program, which allows the borrower to roll the cost of some home improvements into the mortgage, whether it be a purchase loan or refi.
With these loans, the cost of the improvements is advanced before they are made, and the contractor is paid from the loan proceeds. Consequently, the borrower does not need to take out two mortgages -- one likely at a far higher rate -- for the expenses.
The ideal customer for a 203(k) is an investor or wannabe homeowner with his or her eye on a clunker of a house, a fixer-upper, at a good price.
And then there’s the category of loans known as “non-Q” mortgages. These are loosely defined as loans to borrowers who pass the ability-to-pay test, but who have some characteristics -- poor credit scores, for example -- that make their loans ineligible for sale to Fannie, Freddie or Ginnie. These include jumbo loans that are above the maximum amount Fannie and Freddie can purchase, loans to investors who own more than 10 properties, loans to foreign nationals and loans to “challenged borrowers” who have suffered through a recent housing event such as a divorce, major illness or foreclosure.
In other cases, some lenders are starting to court investor-borrowers who fix and hold houses, as opposed to fix and flip. The borrower need not necessarily be an experienced investor, but could rather be a first-time property rehabber. The cost is a little higher and the loan has a shorter term. But once the borrower can exhibit a history of being a successful landlord, he or she can always refinance into a standard 30-year mortgage.
-- Freelance writer Mark Fogarty contributed to this report.