I asked a loan broker I use, Chris Weber of First Security Loan 415-209-7622 to give us an update on the changing loan market and this is what he had to say.
Not too long ago conservative buyers would finance the purchase of their new homes with a 30-year fixed. Usually this was the loan of choice for really well qualified buyers who intended on keeping the property for a long time. But, not everyone is considered a really well qualified buyer in the “Lender’s” eyes. Nor did everyone feel like they needed, or wanted to pay for the security of a 30-year fixed. For these buyers there were many different options to choose from.
Many first conversations with new clients began with the fact that they were referred to me was because I was so creative. I would be able to create the right loan program and payment to meet their specific needs.
Lately the market has changed. We are experiencing a “tighter” market, meaning property values have leveled or may still be dropping, and interest rates are rising. In this new, tighter market we have experienced some changes in the lending market. The first change is in the interest rates themselves. For the past few years the Fed has been trying to slow the economy by slow raising interest rates. The only rate the Fed actually controls is the discount rate, the interest rate banks lend each other money overnight. This the shortest of the short term rates. The premise is the “trickle down effect.” Slowly the short term rate increases (adjustable loans) will create long term rate increases (fixed rate loans). Interest rates will rise and inflation will be kept at bay.
The short term adjustable interest rates did rise, but a rate much faster than the long term fixed rates. At one time short term interest rates, i.e. the 5-year fixed, or 7-year fixed loan programs were higher than the 30-year fixed. All of a sudden creativity was of no value if it produced a higher interest rate and payment.
The latest change in the market is the margin between the short term rates and the long term rates has widened again. Now the savings of a 5-year fixed over a 30-year fixed is worth the risk of what could happen to the interest rate when it adjusts five years from now.
But, a new challenge has surfaced. Lenders are taking a harder look at how they assess risk. In interest rate pricing risk equals price: The higher the risk, the higher the interest rate. One of ways the Lenders are reducing risk is by reducing their qualification ratios. This is a calculation to determine a buyer’s total monthly debts, including their new home costs as a percentage of their income. Another way is by reserving the best pricing for higher credit scores, or perhaps for buyers with large down payments. Another component of risk in the Lender’s eyes is the loan program itself. Lenders feel there is less risk in a fixed loan than an adjustable. Some Lenders will allow you to carry higher ratios if your loan payment is fixed. Now, sometimes buyers who do not qualify for a lower rate adjustable will be approved on a 30-year fixed loan. My most creative approach is the most conservative loan.