Tight Fists in the Mortgage Market

IN LATE 2007, I GOT A NEW MORTGAGE from Sovereign Bank on an investment property in Philadelphia, and refinanced a weekend house in upstate New York with Countrywide, just before the fall.

In both cases, despite a perfectly lovely FICO score, I had to jump through an extensive series of hoops. So I’ve never quite understood this whole business about mortgages having been handed out freely to anyone with a heartbeat (I suppose the difference is that I was looking for a decent rate).

Lately I’ve been wondering: if I were to find that next great old house this weekend, would I be able to get a mortgage in this market? How much cash do I have to hoard? What kind of creative financing would be in order?

Short of applying for a new loan myself and finding out the hard way, I decided to e-mail my questions to several real estate brokers I know.  I got replies from Gary DiMauro of Gary DiMauro Real Estate, a vintage-property specialist with offices in  Tivoli, Hudson, and Catskill, N.Y.; Jim Cumisky of Quogue East Realty, East Quogue, L.I.; and Johnny McDonald, a Philadelphia realtor and developer of LEED-certified ‘green’ condos in the Northern Liberties area, including Onion Flats and Thin Flats.

Here are my questions, and a summary of what they had to say:

  • How “frozen” is the current mortgage market?  Is it really more difficult to get a mortgage than it was a year ago?
  • How much down payment is required now?  Is that percentage more than in the past?
  • How flexible are sellers as to prices?  Are sellers taking back mortgages more than in the past?

McDonald’s answers came back in a flash, short and sweet.  The market is “pretty frozen unless you are 720 FICO or better, with two years documentable income and typically 10% down payment.”  But, he added, “Unless you are a super-strong A+ borrower, even 20% down still might not get you a deal.”

Sellers who are serious about selling are flexible, Cumisky said.  And sometimes creative.  Recently he had a buyer for an $800,000 house, but that buyer had been unable to sell his own home in Saratoga, N.Y., and needed the proceeds from that sale to make the purchase.  The seller agreed to rent the home with an option to buy.  The prospective purchaser pays ‘a fair amount’ toward the option annually, in addition to the rent.  If, after two years, the purchaser has not sold his Saratoga house, the seller will close the sale with the purchaser and hold a mortgage for ‘a period of time.’

DiMauro called these “the toughest times I have seen in my 19 years as a realtor. Despite lower rates, money is very hard to come by unless you have sterling credit (750-800 FICO score), a very conservative debt-to-income ratio, and at least a 20-30% down payment (much higher than those unconventional loans of 5-10% down payment and sub-prime loans of up to 110% loan-to-value financing of just a year ago). Very few loans are getting approved and it is definitely much worse than a year ago.”

People with cash are golden. “We had more cash transactions in 2008 than any previous year since I started in 1993. In 2008, real estate was perceived to be a much safer investment than the stock market. Those that put their cash in real estate, even despite the downturn, are feeling pretty happy they did.”

On the bright side, said DiMauro: “Sellers that have been trying to sell for the last year or more with no success are more willing to listen to reason and recognize that price is the only obstacle to selling their property. Those who need to sell will lower their prices to attract buyers, and we are slowly starting to see that happen.”

It may be late ’09 or early 2010 before prices start to go up again, DiMauro believes. “But don’t expect everything to be at fire-sale prices. There are still plenty of triple location properties in turn-key condition that are commanding healthy prices. Northern Dutchess, Columbia, and recently Catskill in Greene County are very desirable locations with very little over-development. The national real estate market outlook is one thing.  The local market outlook is another. And all real estate is local.”

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