Despite all the information in the press about a thaw in the availability of mortgages, many highly qualified borrowers are still having a difficult time obtaining financing. This is especially true if you own a more expensive home.
What can you do when either you or your house is not a good fit for “traditional” financing?
Because of the tight credit market, a host of new alternatives to traditional financing are starting to emerge. If you are having trouble locating the right loan for your situation, here are just a few of the resources to consider:
1.Credit unions. Unlike banks and mortgage companies that sell their loans on the secondary money market, many credit unions actually keep the loans they make in their own portfolio. (The secondary money market purchases bundles of loans from lenders. These loans must meet specific guidelines such as those set by FHA, Freddie Mac and/or Fannie Mae. Once the primary lender sells the loan, the lender is now in the position to make another loan to a new borrower.) If the credit union does not sell the loan on the secondary money market, they can set their own loan requirements.
2. Seller financing. Did you know that approximately one-third of all property owners in the United States own their property free and clear? Given the low rate of interest being paid for savings accounts and for government securities such as T-bills, an increasing number of sellers are electing to carry part or all of the financing on their sale. This can be a win-win for both the buyer and the seller.
3. Private financing. “Hard money” loans have been around for years. For example, you might have a first mortgage for $80,000 and a second mortgage that you took out for $150,000 to do a major remodel. Your house is now worth $500,000 with only $230,000 of loans. You would like a third loan of $75,000 on your home to help your mother receive the long-term medical care she needs. In this scenario you have three different options.
Your first option would be to apply for a cash-out refinance from a traditional lender. Most traditional lenders, however, are unwilling to make third mortgages, even though you may be highly qualified. A second approach would be to apply for a new first loan on the property for $305,000.
A different alternative is to seek a private source to obtain a loan. These loans are called “hard money” loans as differentiated from “purchase money” (loans placed on the property at the time of purchase) or “refinance” (loans generally made through a traditional lender where the lender pays off the existing loans and replaces them with a new first or second mortgage).
“Hard money” is more likely to be from a private lender. Because these loans are much riskier, the interest rates and the fees are usually higher than they would be for more traditional financing. In virtually every case, it’s better if you can qualify through a traditional lender as opposed to obtaining a “hard money”
4. Private investment group for jumbo short sales. The mortgage crisis has hit owners of expensive properties especially hard. The situation for those facing a short sale on their property is exceedingly difficult. Jumbo loans are difficult to obtain. A new, well-funded group of investment specialists has put together a new program to help owners with mortgages greater than $750,000 and where the owner owes more than the property is worth. Their goal is to help these owners out of their current situation with as much of their credit and dignity intact.
For properties that qualify, the investment group goes to the mortgage holder and negotiates a short sale. The investment group is the buyer. Because the group may have multiple loans from the same lender, they have much better leverage than a single individual in getting the short sale approved.
If you have decent credit, you do have options. Review each choice carefully, discuss the tax consequences with your CPA or tax attorney, and then make the best decision for your personal situation.
5. Online resources. Zillow.com offers an online mortgage tool allows you to shop anonymously for both conforming and jumbo loans. Users can enter a loan amount, the property location, and a credit score (if you don’t know it, the site provides a link to determine your credit score). The system then sends your request to their 4,500 members.
This approach provides an apples-to-apples comparison in terms of interest rates and loan fees. The fees you see quoted are the fees you will pay. Each lender can also see bids made by other lenders. As the buyer, you decide which lender you want to contact. It’s important to note that if you don’t have great credit, you may not receive any bids.