THE MORTGAGE BAZAAR by: Nizar A Motani, Ph.D
Low interest rates have contributed to metro Atlanta's robust housing market. This trend is likely to continue in the second half of 2002 and perhaps even beyond that. Prospective home buyers face two major decisions: defining and discovering their dream house and selecting the right mortgage. They should first consult a mortgage professional and then a real estate agent. Real estate agents and sellers prefer to work with buyers who have already been pre-approved by a reputable local lender.
This article only mentions some of the dizzying array of products available from the Mortgage Bazaar where bankers and brokers compete. Their menus offer the traditional 15 and 30 year-fixed-rate loans and Adjustable Rate Mortgages (ARMS) which can change monthly, every six months, yearly or after three, five, seven or ten years. Moreover, interest only; zero down; piggyback; purchase/repair; construction-permanent; full, alternmative, reduced or no documentation; jumbo, non-conforming; expanded criteria, subprime;. FHA/VA; foreign national; no credit history, alternative credit; no social security number and no GREEN CARD financing - among many others - certainly requires a knowledgeable mortgage broker to help navigate this maze.
Interestingly, the Mortgage Bazaar has its own caste system with rewards for 'sublime' borrowers and retribution for lower caste, especially 'subprime' borrowers. Prospective borrowers, whether buying or refinancing, may be able to 'find' their caste during the pre-approval process.
BRAHMINS: They have outstanding credit history (720+ score), sufficient verifiable income; stable employment or self-employment record and adequate liquid assets. These 'sublime' customers get the best mortgage deal: lowest rate, minimal or no downpayment, and favorable closing costs. The bazaar is most accommodating to these elitist applicants because they conform to the guidelines set by Fannie Mae (FNMA) and Freddie Mac (FHLMC).
Those who do not conform to FNMA/FHLMC requirements of two years' verifiable, satisfactory credit, employment, income, and rental profiles, as well as seasoned assets, are relegated to the lower non-conforming castes (620-680 range). Their interest rates, closing costs, and downpayments tend to be much higher depending on overall individual situations. However, they can choose between fixed or adjustable products without prepayment penalties and refinance as brahmins, when their circumstances have improved.
The worst retribution is inflicted on the 'subprime' castes. Because of bruised credit (generally below 620 score) and other shortcomings in employment, income, assets, and rental history, these lowest castes are charged the highest rates for two-or three- year ARMS. Higher closing costs and prepayment penalties further compensate lenders for their risk.
With proper guidance from an honest mortgage broker - yes they do exist! - and self-discipline during the prepayment penalty period, refinancing to a higher caste loan is possible. Therefore, there is light at the end of the tunnel.
Unfortunately, the bazaar shuns the 'outcasts'. These untouchables have not only ruined their credit(below 580 score) but also lack any compensating factors such as a sizeable downpayment. Their only entry into the housing market is through the back door - seller financing or lease purchase agreement.
Moneywise is hosted by Rajesh Jyotishi with Shalin Financial Services, Inc. A Registered Investment Advisor. For questions, he can be reached at (770) 451-1932, or email at rajesh@shalinfinancial.com
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