A buyer with 20% down payment and a 699 FICO score gets an
8.125% rate for a 30-year loan.
By JEFF LAZERSON | email@example.com | MortgageGrader.com | September 12, 2023
Article originally posted in Orange County Register on August 30, 2023.
Circa 2000 was the last time I handed over a Fannie Mae 30-year fixed-rate mortgage at a lofty 8% interest rate to a homebuyer.
Today, conjuring up a 20% down payment and a 699 middle FICO score means a buyer is looking at an 8.125% rate without points for a 30-year loan.
One year ago, that same borrower was able to borrow at roughly 6.125%. Assuming a $600,000 mortgage, the principal and interest payment is $4,403 on the 8.125% rate compared with $3,598 last year. That’s more than a 22% increase. And that’s for a borrower with a very respectable $150,000 down payment and decent, but certainly not excellent, credit.
This week’s Freddie Mac’s average mortgage rate landed at 7.18%. A 41-point FICO deficit (699) increases your mortgage rate by nearly a full point to 8.125%. Freddie Mac’s weekly rate survey assumes a 20% down payment and excellent credit (defined as a 740 middle FICO score) but does not assume anything with respect to loan origination points.
Credit scores matter.
We’ll experience worsening rates by another one-half point, my crystal ball says. Mortgage rates will peak by the end of the year.
The ongoing home price ascent and the highest mortgage rates since the turn of the century are bad enough. Tandemly, a shrinking mortgage menu and the number of mortgage providers will limit consumers’ mortgage opportunities going forward. Nobody needs sunscreen when it’s raining. Right?
If you are an A+ credit borrower (great income and assets with a 740 or higher middle FICO score), there’s little need for angst. But if you’re on the fringe of qualifying, maybe it’s best to do something sooner than later. The menu of mortgage options is shrinking quickly.
Two years ago, I knew of at least three mortgage lenders that offered purchase and refinance loans with few or minimal standards. Most borrowers simply needed a 20% down payment and to have a minimum 720 FICO score and some payment reserves.
These types of “fog the mirror” loans were offered by certain Community Development Financial Institutions or CDFIs. This type of mortgage provider is designed to easily assist borrowers in the nation’s most economically distressed communities when it comes to mortgage financing.
Unlike other loan programs, mortgages offered through CDFIs are exempt from having to demonstrate a borrower’s ability to repay the mortgage. All other owner-occupied and second-home mortgages require lenders to document borrowers’ ability to repay.
Last week, the US Securities and Exchange Commission announced it is looking into one such lender, Irvine-based The Change Company. The SEC is looking into the company’s mortgage-backed securities, according to reports from Bloomberg. The regulator also said it’s looking into Change Co.’s chief executive, Steven Sugarman.
Full Disclosure: My firm Mortgage Grader is an approved broker with Change Wholesale. I’ve funded mortgages through Change.
Today, Arizona-based Champion Funding is one of the only CDFIs still offering a mortgage for those who struggle to qualify for a conventional loan. Its rate and the requirements are ridiculously high. We’re talking about a brain-numbing 11.375% rate with 20% down for a 30-year mortgage. And the borrower will need to show 24 months of mortgage payments (principal, interest, property tax, insurance, and any HOA) in the bank, in advance of funding.
Now, if you’re shopping for a condo or a townhome in an HOA, the situation is even murkier.
In my experience, many first-time homebuyers are looking for the most payment-affordable property. If that’s a condo and you want a fairly priced mortgage, it has to either be approved via Fannie Mae, FHA approved or VA approved (if you’re a military veteran).
However, the lending climate for HOAs at the federal level has shifted since the collapse of Champlain Towers in Surfside, Florida. HOA communities that fail to meet new standards established by Fannie Mae are put on what I call a no-go blacklist. As of Jan. 30, Fannie listed 1,414 condo projects with which it would not lend. As of Aug. 14, that list increased 44% to 2,043 projects nationwide. There are at least 370,000 HOA communities in the U.S. so the blacklist represents a small but growing number that no longer qualify under Fannie Mae rules.
If a condo project is not Fannie Mae warrantable, financing is significantly more costly in the form of a minimum 20% down payment and mortgage rates about 2% higher than Fannie Mae rates (if you can find a lender willing to make a non-warrantable mortgage).
The mortgage machine is a volume-driven business. Thousands of mortgage industry jobs have vanished during this housing finance famine. Consumers are likewise losing valuable knowledge, skillsets and experienced mortgage loan originators.
If the 2023 version of the mortgage meltdown lasts for another six to 18 months (as I anticipate), the very large and the very small mortgage firms will be the only ones left standing.
Consumers will have fewer choices for both mortgage loan originators and mortgage firms.
Freddie Mac rate news: The 30-year fixed-rate averaged 7.18%, 5 basis points lower than last week. The 15-year fixed rate averaged 6.55%, unchanged from last week.
The Mortgage Bankers Association reported a 2.3% mortgage application increase compared to last week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $723 less than this week’s payment of $4,920.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 6.25%, a 15-year conventional at 6.25%, a 30-year conventional at 6.625%, a 15-year conventional high balance at 6.875% ($726,201 to $1,089,300), a 30-year high balance conventional at 7.125% and a jumbo 30-year fixed at 7.125%.
Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $726,200 in LA and Orange counties.
Eye catcher loan program of the week: A 10-year fully amortized fixed rate, mortgage at 5.875% with 1.75 points cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or firstname.lastname@example.org. His website is www.mortgagegrader.com.
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Jeff Lazerson - Mortgage Columnist since 2011