Young, first-time home buyers with little or no money for a down payment are not the only consumers chasing the dream of homeownership. Older folks have dreams, too, and some of them are starting over in new areas, with new partners and perhaps a new part-time job.
That housing category also has its peaks and valleys. The overall homeownership rate for seniors age 64 to 74 fell slightly between 2002 and 2003, but the percentage of older Americans who own homes is still much higher today than it was 10 years ago, according the 2004 State of the Nation’s Housing Report published by Harvard University’s Joint Center for Housing Studies.
Many older folks trying to re-enter the market understand the huge upside of home appreciation and have adopted the mindset of doing what it takes “just get in the door” of a home and begin accruing equity. Their backgrounds do not fit seamlessly into the conventional lending bracket, known as “conforming” mortgages, and they are forced to pay high rates and fees brought by the subprime market. If savings is not the challenge, then there are often issues with monthly income cash flow or poor credit.
For example, an elderly couple (Fred was in his early 70s while Mary had just turned 68) recently married and were on fixed incomes. They had no significant funds for a down payment yet wanted to buy a home in a rapidly appreciating Puget Sound area before home prices went out of sight.
They did not want a long-term loan with a high interest rate, so they found a program with a two-year, fixed-rate loan at approximately 3.5 percentage points higher than the 30-year fixed rate.
However, that loan allowed the couple to refinance to a lower rate in 24 months after they had built up equity and their monthly income improved. Two years later, even though they still had some credit issues, they refinanced into a long-term, fixed-rate loan very close to the prevailing market rate.
For many borrowers, there is nothing “sub” about subprime. It is simply their only way to purchase a home. What gives the subprime loan industry a bad name often are the lenders chasing down-and-out consumers with open-ended deals and astronomical rates and fees. Some of these loans include hooks that keep the customer in the mortgage for many years. A good example was the $484 million settlement reached between Illinois-based Household International and the attorneys general in all 50 states last year to settle several pending lawsuits involved alleged predatory lending practices.
“I think people who have been renting are surprised that they can actually qualify for a conforming loan,” said Craig Meyer, vice president of PCBank Home Loans, a local lender that has developed a niche for credit-challenge loans in addition to a variety of conforming mortgages. “If they can’t qualify for the best rates, there are 100 percent loan programs now that allow poorer credit borrowers to qualify. Four or five years ago, there wasn’t the secondary market for these loans as there is today.”
The mortgage game is all about risk and return. Conforming lenders typically abide by the terms and conditions set by the secondary market. A lender will often give a borrower a certain amount of leeway – higher debt to income ratios – especially if the lender is keeping the loan. However, many lenders will not stray far from the norm, allowing the lender the flexibility of selling the loan down the road.
“Finding a good loan person is similar to finding another professional service,” said Sam Tuttle, a former Pacific Lutheran University basketball star who started PCBank Home Loans with Meyer and two other local groups.
“You ask people at church, at work, at school. Where a lot of people get into trouble is chasing interest rates in advertisements that are too good to be true – especially if they’ve got credit problems.
“Unfortunately, it’s the lender who tells these credit-challenged people about a rate that’s too good to happen. Or, they’ve got a friend of a friend who can close a deal. The search should be toward a company with integrity at all costs. If you have to take a high-rate loan for a specific period, have a plan to get out of it.”
Lenders, especially those dealing in the subprime market, have been damaged by unscrupulous players who have taken advantage of borrowers unfamiliar with the mortgage process. These borrowers, usually seniors and immigrants, have qualified for better rates and fees than they actually received but simply did not understand what they were signing. Bait-and-switch stories often surface and language challenges also have been a problem.
If you are applying for a loan, ask friends and neighbors about which companies they would recommend. Conforming or non-conforming, some places are better to work with than others.
Tom Kelly hosts “Real Estate Today” from 11 a.m.-noon Sundays on 710 KIRO-AM. Send questions and comments to news@tomkelly.com.
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