The Willy Nilly World of Mortgage Financing in 2012
Every Realtor who has survived the last 5 years can tell you horror stories when it comes to financing. Certainly, we are no exception. Our most recent calamity occurred when a highly qualified buyer chose to finance rather than pay cash due to the historically low interest rates. Against our recommendation, he chose to use his local (non-Florida) bank where he enjoyed a long standing relationship. I could go into details but the short story is that he became so frustrated that he backed out of the deal altogether.
The world as we once knew it no longer exists. Banking relationships no longer carry the weight that they used to and the criteria applied to borrowers often make little sense to the logical mind. I recently made an observation to a client that I believe bears repeating. Years ago banking was done on a handshake. Banks established relationships with pillars of the community and a man’s word was all that was needed. Of course things had to be documented so when it was convenient you made a trip to the bank, signed a few papers, and the loan became official. Funny thing was that defaults were nearly non-existent back then. Fast forward to 2012 where a typical closing with a loan takes nearly 45 minutes due to all the signatures and notary stamps necessary. Interestingly enough, with all the many signatures and documentation, defaults are at an all time high. Now that I have had my little rant, I will get off my soap box and get on with the message I want to deliver.
For all of the nuisance that loans can be, I believe that those of us borrowing for a mortgage right now will look very smart 5 years down the road. I am certainly no macro-economist but I am not alone in believing that when the government has a deficit the size of ours and must resort to borrowing on such a large scale it will become impossible to hold interest rates as low as they presently are. Additionally, I am a believer in controlling my destiny to the extent that I can. I never believed in ARMs (Adjustable Rate Mortgages), Balloons, etc. that are banking on future events for viability. I believe that you establish a comfortable mortgage payment for your current situation and regardless of what goes on from there you know that you will be able to sustain it.
Now for the bad news, Loans are a pain in the neck to get. Even well heeled individuals find it most difficult to obtain financing. Banks these days like simplicity. They like high credit scores, high income, and low debt. Unfortunately, people with high income and high credit scores most often have very complex financial situations. Banks now go through bank statements and want to track every expenditure. This can become a nightmare for successful business people who have a maize of LLCs, trusts, etc. The more you are worth the seemingly more difficult it is to obtain financing. The individual I spoke of at the beginning of this article thought he would sidestep this by working with the bank he had a relationship with. The problem was that his state and Florida did not do things the same way and in spite of much maneuvering they could not be reconciled to a point that satisfied underwriting. In his state condo associations insured a borrower’s contents and in Florida they insure the structure but the buyer insures the contents. It was not sufficient that the borrower insured it on his own and provided proof. The loan was denied. Yes, it is that crazy. We are constantly uncovering new quirks in underwriting.
For all of the difficulty however, loans are still being written. Our approach has been to establish a number of relationships with lenders in order to be able to match the right lender with a client’s situation. If at all possible, 20% equity is advised to circumvent the expense of mortgage insurance.
To sum things up, I believe that we are seeing the perfect storm (low real estate prices, and low financing rates) begin to fade away. We are seeing baby boomers who are 3 to 5 years from retirement saying to themselves, “I can buy now, rent it out in this great rental market and enjoy for the same money that I think it will cost to buy in 3 years”. I think there is reason to consider this train of thought and financing at today’s rates can be a very real part of the equation. Brad and I are happy to explore your specific situation and see if it makes sense for you to jump in now or wait.