In the years following the burst of the housing bubble, and the recession that followed, securing a home mortgage ranged from extremely difficult to nearly impossible. And while qualifications to obtain a mortgage are still quite stringent (especially for those without perfect credit), there are signs some lenders are starting to ease up on their requirements. Some banks and credit unions are even returning to some of the more risky financing products of the past:
These are the loans that got borrowers into trouble in the first place. For example, the piggyback loan, when borrowers take out two mortgages simultaneously (or a mortgage and a line of credit), is being seen again. These are typically used so a borrower can avoid the private mortgage insurance required on traditional mortgages for more than 80 percent of the home’s value. And some credit unions are offering 100 percent financing in markets where home values have stabilized and appear to be on the upswing.
After the housing market collapse, most borrowers with little money to put down, and less than perfect credit, had few options except the Federal Housing Administration. The F.H.A. does not make loans but rather insures mortgages that meet its guidelines, and enabled people with marginal credit scores and less than 4% down to obtain loans. As a result, the number of new mortgages originated by the F.H.A. skyrocketed.
But now more prospective homeowners with smaller down payments are able to use private mortgage insurance. That is because the private insurers are also becoming a bit more flexible. At the same time, the F.H.A. has been significantly increasing its fees over the last couple of years. Borrowers must now pay an upfront mortgage premium of 1.75 percent of the loan amount, which can be rolled into the mortgage.
Recently another F.H.A. fee, the annual mortgage insurance premium, (MIP) rose to 1.35 percent from 1.25 percent of the loan, but was typically canceled once the mortgage amount fell to less than 78 percent of the original loan value. However starting in June 2013, the insurance must generally be paid for the life of the loan. This could have huge impact on future borrowers, who may not have other financing options other than the F.H.A. (Private mortgage insurance can be canceled once the loan amount is less than 80 percent of the home’s value.)
Some lenders, including credit unions, are offering members up to 100 percent financing without requiring private mortgage insurance, though the loans carry a slightly higher interest rate, about 4.125 percent for borrowers with good credit histories.
Many larger lending institutions also offer mortgages with relatively low down payments. Bank of America allows up to 95 percent of the home value to be financed, (with mortgage insurance), and Citibank offers loans with down payments of less than 20 percent with insurance. U.S. Bank and Wells Fargo allow qualified borrowers take out two loans: one for 80 percent of the home’s value and the second for 10 percent, along with a 10 percent down payment, which lets them avoid paying private mortgage insurance. Some borrowers are increasingly considering home equity lines of credit for the second loan, however these typically have adjustable interest rates that could substantially increase after a couple of years.
There still are number of financing options available in 2013, especially for borrowers with a decent down payment and a good credit history. This trend will most likely continue as lending institutions continue to relax their lending restrictions that were increased after the housing market downturn. The key is to do your homework to determine the best financing option for your particular situation. You could possibly save tens of thousands of dollars in interest over the term of the loan.