I imagine you probably noticed that there has been significant volatility in the financial markets over the past several weeks. This was initially caused by a substantial revaluation of risk of sub-prime mortgages but began to spill over into many other debt markets resulting in a severe credit contraction. So how does this “crunch” affect your ability to finance the purchase of your home?
I am getting many calls from prospective buyers and sellers asking me about the situation. I tell them what I am experiencing, and then have them talk with my mortgage brokers to gain further clarity. Although I am not a mortgage broker, I decided to bring their insights to this newsletter.
First off, most of the problems with the housing and mortgage market do not fully apply to Manhattan, which has historically had stricter lending guidelines and continues to have a significantly stronger housing market.
Secondly, while the anxiety across the US is in full force now, the turbulence will calm down and normalcy will return, it always does.
Third, I am seeing and hearing from mortgage brokers that smaller banks (which tend to hold onto the mortgages they issue and are thus much less impacted by debt market turbulence) are a good source of mortgages, though their lending guidelines can be stricter. Nevertheless, many larger banks are also still eager to finance solid, credit-worthy buyers.
Lastly, loans at amounts less than $417,000 (called “conforming loans”), have been almost unaffected as they are government subsidized with rates holding at about 6.5%. In many cases, a buyer can utilize a conforming first mortgage coupled with a large home-equity loan to get the financing they need. These are the type of creative structures that will enable savvy buyers to prosper.
What should prospective buyers do in this market? As I said, the first thing is be clear about your financial and personal objectives. Review your finances, clean-up any negatives in your credit rating, maximize your liquidity and then get pre-approved. This eliminates the issue of whether you can get a mortgage when you make an offer to the seller. Buyers also need to be realistic and not overextend themselves.
As we all know, mortgage lenders have been very aggressive in the past decade, the results of which have contributed to the current problems, and some mortgages may be more difficult to obtain. I strongly advise that buyers seek out a professional, experienced mortgage broker who works with various lending institutions, both large and small. They know which institutions are lending and under what terms and rates and are creative in finding a mortgage to suit the buyer.
I have summarized these key suggestions into a simple set of rules:
Fran’s Mortgage Rules
- Make certain your credit is cleaned-up
- Obtain liquidity
- Resist making rash decisions
- Target the home you want
- Get pre-approved
- Avoid overextending yourself
- Get an experienced mortgage broker
- Explore all options