Lenders are being more cautious. While mortgage rates continue to hit new lows, the ultra-low rates are out of reach for many would-be borrowers who can’t meet strict underwriting standards.
And, new national data suggests that underwriting standards for getting a loan are getting even stricter.
That information, along with the costs of getting a loan, are the main reasons why I was surprised when the son of a longtime friend recently told me that the young borrower had declined an offer of no-cost seller financing to accept a slightly lower interest rate from a builder-lender.
In a recent column, we discussed how the young man – Patrick – chose a newer home in a subdivision rather than buying an existing home in the neighborhood he long had desired. The main reasons were that he “wouldn’t have to do anything” for years to the home and that he received a slightly lower interest rate from the builder. In that column, we discussed the difference between performance and maintenance. Now, let’s check at the financing decision.
First, consider what it takes to get a loan today. The developer of FICO scores, Fair Isaac Co., revealed that 78.5 percent of all consumers have scores that fall between 300 and 749. However, FICO credit scores on all new loans closed in August averaged 750. That’s nine points higher than one year ago, according to a survey of about 2 million mortgages by Ellie Mae Inc., a mortgage technology firm used by many lenders.
“Barely one in five, in other words, scores high enough to meet today’s FICO score averages at Fannie and Freddie,” according to The Washington Post.
Besides high credit scores, borrowers are coming in with higher down payments to satisfy lenders, too. Homebuyers who used a Fannie or Freddie loan had, on average, a 21 percent down payment in August. Homeowners who refinanced had average equity in their homes of 30 percent.
Doug Duncan, Fannie Mae’s chief economist, recently said he thought that loan standards will eventually ease as banks reduce some extra risk-based fees that they have added to benchmark quotes since the mortgage meltdown.
But what if you didn’t have to go to a lender for a home loan? Seller financing is an underestimated benefit not only because of today’s increased lender scrutiny but also because the buyer dodges most all the fees associated with the loan. For example, in Patrick’s case, he decided on a 3.5 percent loan from a lender rather a 4.0 percent loan.
Let’s say the total costs of a $200,000 loan come to 2 percent of the loan amount, or $4,000. The monthly difference between a 3.5 percent loan and 4.0 percent loan is approximately $57 a month. Not only would Patrick have to come up with the cash (in addition to the down payment on the house) to close the deal but it would also take more than seven years to make up the difference.
While many owners make “cash out, conventional” financing a requirement when selling a home, others are more than willing to negotiate price and terms. While homes are selling quickly in many neighborhoods, others continue to sit. Those sellers often will negotiate terms, price or both. And some sellers, particularly seniors, are willing to take a healthy down payment and “carry the paper” on their real estate as long as they are guaranteed 4 percent interest on their money. In most cases, it’s difficult to get that rate in non-risk accounts.
If you are an owner and seller-financing will help you sell your home, there are several safety features you can build in to protect your investment. Among them:
It’s a good idea to obtain a credit report on the buyer. Why would you want to sell your home or other property to someone you know nothing about?
Write into the earnest money agreement that the buyer provides, and keeps current, a homeowner’s insurance policy.
Purchase tax registration coverage from a title company. That way, if the property taxes are not paid, you will be notified. Include in the earnest money that the buyer make timely tax payments.
Insist on a “due on sale” clause or that you, as the initial seller, must approve any subsequent sale in writing. That way, if the property is sold before the term of your note or contract, you will receive all your cash upon the transfer of the property, or retain the ability to approve the new buyer.
Just because lenders are more scrutinizing, it doesn’t mean that there are no other financing options.
Tom Kelly’s new E-book “Bargains Beyond the Border: Get Past the Blood and Drugs: Mexico’s Lower Cost of Living Can Avert a Tearful Retirement” is available online.