Real Estate: Show them (you can pay back) the money!
Perhaps a 2005 flashback scene from Season 4 of the Netflix comedy “Arrested Development” depicted the lending market best. In it, actor Ed Helms, playing a realtor, tells two of the show’s main — and jobless, and nutty — characters that he can get them into a mansion through a new “NINJA loan.”
“No income, no job and no assets,” he says, to their delight.
It’s laughable now, but local experts say the depiction wasn’t far off for some lenders during the last decade. To be sure, NINJA didn’t mean banks actually wanted to lend money to people without income, jobs or assets. They just didn’t ask for verification.
Fast-forward to today, post-housing crisis: The banks ask. And that’s good news, local lenders say, as it protects not only banks and American taxpayers (think bailout), but borrowers as well.
The other good news? Despite what people might be hearing, banks are lending. Borrowers don’t need much cash in hand to get a house, either.
“It’s one of the best times to borrow I’ve ever seen — and I’ve been in the business a long time,” says Jim Whitehouse, executive vice president at Suffolk County National Bank and head of its residential mortgage, multi-family and mixed-use divisions. “The interest rates are still excellent. If you have the money, the resources, it’s a good time to call a realtor and start looking.”
Banks just want proof that borrowers have the financial ability to pay back a loan, he says.
“In the heyday, where you didn’t need to prove anything, that’s all gone,” he says. “But it’s just common sense, right?”
Longtime area lender Jim Harrison says many myths abound in the current housing and lending market. He spends much of his time explaining to potential borrowers, for example, that they can put just 3.5 percent down, they can get a seller’s concession to help cover closing costs and they can finance their mortgage insurance.
“Basically, if you’ve been on the job for two years and you meet the minimum credit score for whatever loan program you’re seeking, banks are lending,” he says, adding that among potential borrowers, veterans have the best options.
“The first thing I ask is ‘Are you a veteran?’ and if so, do you still have eligibility?” Harrison says. “They probably have the best loan product out there, because you don’t have to put any money down. There’s no monthly mortgage insurance and FHA and VA rates are typically lower than conventional Fannie and Freddie rates.”
Another myth he encounters, he says, is that the process for securing a Federal Housing Administration loan is much more onerous than a regular loan. Not true.
He also says it’s not true that FHA loans are only for first-time home buyers, another common misconception. Borrowers must make a down payment of at least 3.5 percent of the purchase price for an FHA loan, he says, and a minimum of 5 percent for a non-FHA loan.
There are drawbacks and benefits to both, Harrison says and people should sit with a professional to figure out which works best for them.
Just as in 2005, there are still plenty of loan products to choose from, but lenders today have to follow certain specific guidelines before signing up borrowers.
“Lenders today, with all the new guidelines, they have to really do their due diligence with disclosures and explain products to customers, and what every possible scenario is,” Harrison says. For example, he explains, “There are multiple disclosures the customer has to sign” for an ARM (adjustable rate mortgage) loan.
“Responsible lending has really worked its way back into the industry, and that’s a really good thing for everybody,” he says.
Gone are the times, says Bridgehampton National Bank vice president Aiden Wood, “When if your dog had a Social Security number they could have gotten credit for a mortgage. The government put in all these new regulations to protect the consumer against so-called predatory lending.”
But Wood argues that those safeguards could hurt some consumers.
“For many self-employed people, sometimes with the write-offs that they have for their businesses, they may not show they have the capacity to pay it back,” he says.
As for what it takes to prove creditworthiness to banks, Harrison says simply providing pay stubs isn’t good enough anymore.
“The banks are validating everything you say, not only with pay stubs but third-party validations, like checking with the IRS,” he says. “Since early 2009, every borrower has to sign an IRS Form 4506. That’s your authorization for us, the lender, to secure transcripts from your tax returns for the last two years.”
Another sign that the housing market and overall economy are returning to health: Home equity loans and lines of credit are once again growing in popularity.
“There are no closing costs on home equity lines of credit,” Wood says. “That makes them attractive — and they’re interest-only for 10 years.”
Whitehouse says that as home values rise and people have more equity in their homes, they’ll start gravitating more toward home equity loans rather than refinancing and cashing out the difference, a common practice in recent years among those who want cash.
“You can do a cash-out refinance, but if interest rates are higher than what you have, people won’t want to do that,” he says. “So I think we’re going to start to see [home equity loans] come into favor more. I think lenders will be a bit more cautious in terms of their underwriting criteria, too.”
He says home equity borrowing plummeted in popularity during and after the recession not only because people lost equity when home values dropped, but because many people put off on borrowing until more certainty was restored to the economy — and their lives.
“Everyone really hunkered down and a lot of home improvement stuff was really put on the back burner,” he says.
This is article was printed in the northforker Real Estate magazine, a supplement in the Aug. 7 Riverhead News-Review.
