This summer, interest rates are low, and housing prices are down. But since the credit crisis, potential homebuyers are choosing from a smaller pool of financers. And the mortgage products these lenders are still offering often come with tighter guidelines that can change at a moment's notice.
That's partially why Jerry DeBacker and his wife, Ellen, took 18 months - and a full three years after moving their family to Bellingham from Idaho - to find and land their fixer-upper home in the South Hill neighborhood.
They wanted a good home, a good neighborhood or both. More important, they wanted a 30-year, fixed-rate loan at with a high loan-to-value ratio - i.e., the percentage of the loan compared to the purchase price - and minimal mortgage insurance, or the lender's security blanket if the loan can't be paid. Plus, they wanted a low down payment to keep cash on hand for renovations.
They got all of the above, Jerry DeBacker says.
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Their secret? They had a plan.
"We were told all along, 'you can qualify for so much more of a loan. you can do so much more than this,'" says DeBacker, development director for Whatcom Land Trust. "But we waited until the market moved in our direction as buyers. We knew what we wanted to do."
The DeBackers' mortgage broker, Susan Templeton of Bellingham's Loannetter, says this budget awareness is key to finding the right financing option. Getting to this point takes knowledge of loan-process changes, familiarity with product options and an eye for potential pitfalls.
Most of the mortgage names in the news have changed.
Gone are all or most subprime or Alt-A loans, low- or no-documentation options, and many lenders' adjustable-rate mortgages, or ARMs. For the most part, loans with terms exceeding 30 years and interest-only products - in which borrowers merely pay the interest, not reducing the principle, for a set period - also are only available for select, risk-free borrowers.
But with interest rates just starting to increase slowly from a low of 5 percent in May, the buyer's market DeBacker found still holds.
"People perceive this to the best market ever for good deals," says Chris Farkas, a Realtor with Bellingham's Exit Realty Associates. "Rates are driving people in, certainly. But perceived low home prices are what are really getting them in here."
To lock in a good rate at attractive terms, you first must ensure your credit is strong.
In the wake of the market's woes, lenders scrutinize potential borrowers' FICO scores more closely - even as the average score dips. Nationwide, the average score was 651 in the six-month period ending March 31, according to credit bureau TransUnion.
"A lender wants to see a score of 680 or better," Templeton says. "And really, they want 700."
Another change from the lender side is the size of a down payment banks will accept. Some real estate professionals say minimum down payments have increased to 20 percent, especially for borrowers hoping for low monthly costs or taking on a piggyback loan to avoid mortgage insurance.
WHAT'S OUT THERE
Choices might be dwindling for would-be borrowers on the edge of qualifying standards for conventional loans. But some government-sponsored and private financing options have emerged to fill the gaps.
"For people with jobs who pay their bills and have money in the bank, there are opportunities out there," says, Jason Bloom, vice president of Bellevue's Elliott Bay Mortgage and president of the Washington Association of Mortgage Professionals. "Consumers should be reaching out to their loan officer or mortgage broker and talk about options."
One opportunity for many Whatcom County residents is U.S. Department of Agriculture (USDA) Rural Development financing - a "powerful product" for borrowers seeking a high LTV, Bloom says.
USDA loans only are available to borrowers in towns or areas with less than 20,000 residents. Not an option for Bellingham, they are for properties in Sudden Valley, Geneva and much of northern Whatcom County.
To qualify for a USDA-guaranteed loan, Whatcom County households of four people or fewer also must claim an annual income of less than $74,050. Direct loans and those designated for low-income families have lower max-income requirements. Borrowers also must have good credit and some savings.
The upside: No down payment for some USDA borrowers.
"USDA financing seems to be the new 'no-money-down' deal for first-time homebuyers," Farkas says.
Another no-money-down option is available through the U.S. Department of Veterans Affairs (VA), which guarantees loans for borrowers who meet veteran-eligibility requirements. The VA can back as much as $417,000 of a loan for Whatcom County. Funding fees apply.
"VA always been fairly popular because of its affordability and [for borrowers] not having [to pay] private mortgage insurance," says Alona Wrightson , loan officer at Peoples Bank in Bellingham.
For homebuyers who can afford a down payment but might not meet other loan standards, Federal Housing Administration (FHA) financing has gained popularity. It's not new. But because FHA-insured loans are available with as little as a 3.5-percent down payment and for borrowers with damaged credit or no credit history, they've picked up many people who would have qualified only for subprime loans.
According to research firm MortgageDataWeb, lenders funded 98 FHA purchase loans for Whatcom County homes in the first four months of 2009, compared to 77 in the same period in '08 and 19 between January and April '05 - the height of the subprime boom.
Another FHA benefit: the federal tax credit for first-time homebuyers, which can be as much as $8,000, can be used to offset closing costs for FHA loans for homes bought this year.
The Washington State Housing Finance Commission offers backing similar to FHA for first-time homebuyers meeting income and purchase-price standards. It's also available for all qualified borrowers in other "targeted areas" throughout the state.
Locally, groups such as the Kulshan Community Land Trust also feature down-payment assistance for lower-income borrowers and other financing options for properties in the trust's possession.
PITFALLS TO CONSIDER
Financing also can be effected by factors out of your control.
Take, for example, short sales. These occur when a homeowner owes more on a home loan than the property is worth. The bank decides the best way to recoup some of its investment is via selling the home ASAP, rather than foreclosing on it.
Although short sales are increasingly prevalent, they can take weeks.
"If you need a house in the next 30 days, a short sale is not for you," says Farkas, adding that potential buyers should expect to wait as long as four months for a decision on their offer. "It seems like the bigger the lender, the harder time you might have."
In this time, buyers could lose the low interest rate they were quoted on a loan.
Other time and cost issues could come in the appraisal process. Since May 1, mortgage brokers no longer can order appraisals for loans that Fannie Mae and Freddie Mac will back. Although the regulation aims to avoid broker-appraiser collusion and inflated appraisals, Bloom says it has spurred quality-control issues, underwriting delays and an increase in second appraisals, ordered on borrowers' dime.
"It's not unheard of now to have an appraiser in Arlington given appraisals in Auburn," Bloom says. "But they're not even making enough gas money to go down there."
MAKING A MOVE
So where should buyers start?
Classes and counseling are available at numerous spots in town, including the Kulshan Community Land Trust and many real estate offices. Online resources also abound - though Christina Olson, the trust's homeownership coordinator, suggests approaching them with caution.
"If you're looking for a loan officer or real estate agent, recommendations are the best bet," she says.
All said, even considering economic changes of late, today's potential buyers and borrowers generally are enthusiastic, Templeton says.
"I actually think Bellingham is in a good position to keep on truckin'," she says.