| Applying for and obtaining a mortgage loan used to be a routine matter. Not any more. The politicians have chimed in and turned the process into something akin to the struggle between good and evil. Now you need a guide to get you through the loan process.
There used to be a selection of mortgage products, along with plenty of rules and regulations, but Wall Street wanted more. More products would translate into more money -- profits and bonuses for everyone. Loan officers talked to their clients, who liked what they heard. Clients were happy, loan officers were happy, banks were happy, and Wall Street was simply ecstatic. The politicians urged Fannie Mae and Freddie Mac to join the party, and the beat went on. All this didn't cause the financial crisis that rained down on this nation and half the free world, but it did contribute to it needlessly.
Nevertheless, over 90% of the mortgages in the U.S.A. are intact. In my opinion, the new rules designed to reign in abuses will cause far more problems than they solve. Some are especially problematic:
Exorbitant Charges by Fannie Mae and Freddie Mac
Fannie and Freddie Mac are penalizing borrowers whose loans amortize longer than 15 years if a) loan to value is high (over 60%), or b) credit score is relatively low (under 740). These include interest only ARMS, which amortize longer than 15 years once the interest only period is added in. If you have a 700 credit score and a loan to value over 75.1%, Fannie or Freddie will charge you 3/4 of a point (.75%) just to get the loan. On a $400,000 loan, that's $3,000. If your credit score is 679 and your loan to value is over 60.1% they'll charge you a point (1%). On $400,000, that's $4,000. If your credit score is 645, you'll pay 2½ points (2.5%) for a loan with 70.1% loan to value. Lastly, if your credit score is 635 and loan to value is 70.1%, you'll pay 3 points (3%) just to get the loan. On $400,000, that's a whopping $12,000! These charges do not include any points paid for cash out or buying down the rate.
Furthermore, if the property is a duplex, triplex or fourplex, Freddie and Fannie charge an additional point (1%). Cash out loans, including refinances of first and second trust deeds that weren't taken out at the purchase into one loan, have charges of 1/4 of a point (.25%) for a 740 score at 60.1% loan to value to 2¾ points (2.75%) for a 620 credit score paying and 75.1% loan to value.
If the property is a rental, the charge is 1¾ points (1.75%) if loan to value is under 75% and 3 points (3.00%) if over 75%. If your credit score is 679 and you want a 30 year fixed of $400,000 including $50,000 cash out on a house worth $500,000, you will pay 4 points (4%) or $16,000. If the property is a rental, you'll pay 3 additional points (over 75% loan to value) for a total of 7 points, or $28,000! Can you understand why rentals aren't popular and why someone who has a 679 credit score, which used to be considered good, is considered a poor risk today? Quick answer: Fannie and Freddie went under and are now owned by the government.
Continued... |