THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Saturday, October 21, 1995 TAG: 9510200423
SECTION: REAL ESTATE WEEKLY PAGE: 28 EDITION: FINAL
COLUMN: About the Outer Banks
SOURCE: Chris Kidder
LENGTH: Long : 115 lines
Last week we began looking at the current state of mortgage lending on the Outer Banks. This week we'll take another stab at shedding light on a complicated subject.
While the Kidder's First Rule of Home Financing - ``There's more than one way to skin a cat'' - applies equally to primary, second and vacation homes, specific rates, ratios and lending practices noted in these two columns apply to primary residences.
A house is the biggest single purchase most consumers make. There may be some markets where property values match the dollars laid out for a good car, but it's no contest on the Outer Banks. Housing here costs one-third more than the national average.
Price alone is a deterrent to home ownership for many Banks residents. For others, affording a house isn't as much a problem as qualifying for the financing. Self-employed folks - which includes most construction workers, real estate agents, commercial fishermen, small business owners and the area's sizeable community of practicing artists - find themselves caught in a real bind.
One of the consequences of self-employment is that business is a 24-hour, 7-days-a-week job. You talk it, you drive it, you live it. And one of the only tangible benefits is that your business-related expenses are tax deductible. That's good - until you want to borrow money for a house.
When you want to get a mortgage, all those deductions mean less adjusted gross income. Some lenders will add depreciation and other ``paper expense'' deductions back into your income; some won't. Your AGI, along with fixed monthly expenses, is used to figure qualifying expense-to-income ratios: Total expenses, including housing, shouldn't exceed 36 percent; total housing shouldn't be more than 28 percent.
But just because the figures don't seem to work doesn't mean a mortgage lender can't finance a house for you if you have good credit. It does means you'll need to shop around. You'll have to lay out your finances on several desks, listen to some lenders tell you that what you have isn't adequate, and not lose hope. Most primary residence mortgages on the Outer Banks are written as conventional/conforming loans. That means they aren't backed by the VA or FHA but are written to meet national standards acceptable to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp.
All lenders want to sell some of their mortgages to the FNMA and FHLMC. Some lenders want to sell all of them. Lenders that keep ``shelf products'' (banker talk for in-house mortgages) have more flexibility, says Lisa Cafferty, a loan officer with Centura Bank.
How much flexibility a lender wants changes from time to time. Today, Centura seems to have a market edge on unconventional and non-conforming mortgage loans. ``Because Centura is a local bank, they give us the products to meet someone's needs one way or another,'' explains Cafferty.
Other lenders may not offer as many choices but still have money to lend a buyer who can't qualify for other mortgages. ``No doc'' (no document) loans are usually shelf products, although they are sometimes sold to specialized investors. In either case, lenders can ignore traditional income requirements and income-expense ratios to look at a borrower's complete financial picture.
But the typical no doc loan works on a lower loan-to-value ratio (lenders typically will lend 65 percent or less of the property value). It may have limited term choices (for example, NationsBank only writes them as 15-year fixed rate mortgages) and the interest rate may be a percentage point or more higher.
If you're shopping for construction-permanent financing, as I was recently, you'll run into the one-closing loan. Introduced to this market a few years ago by Cooperative Banks for Savings, it's now being pushed locally by NationsBank, one of nation's largest lenders.
The major appeal of a one-closing loan is its potential for lower fees compared to a two-closing loan. If the lender will lock in the rate for the permanent loan (some won't) at no extra fee, that can be an advantage for folks who don't want to gamble on the money market. NationsBank offers several rate lock-in options.
How much do you really save? Generally, quoted savings for one-closing loans are based on that lender's two-closing charges. If you shop around, you may find that other lenders charge considerably less for their two-closing loans. If cash for closing is a problem, any savings may make a difference.
One potential disadvantage of one-closing loans is that loan-to-value ratios are based on actual construction price. In most cases, houses appraise for more than they cost to build. As a borrower, you may need the lender to consider the highest value possible to reduce your cash payment at closing or to avoid paying for private mortgage insurance (required when the loan-to-value ratio is higher than 80 percent).
Origination fees and points, both paid at closing, should be considered when comparing loans. Norwest Mortgage, for example, wasn't offering a one-closing loan when I talked with branch manager Linda Barber several weeks ago. But Norwest was charging lower fees and no points on their two-closing loan, making its package competitive with another lender's one-closing loan that carried a 1 percent origination fee.
While origination fees (money the lender gets up-front for processing the loan, quoted as a percentage of the mortgage amount) add to the cost of a loan, paying points can reduce the cost in some cases. Points represent the difference between the interest rate of the mortgage and the current interest rate being paid by the secondary mortgage market to purchase the mortgage. Most lenders offer no-point loans at higher interest rates.
Before you decide about points, take a close look at what one will buy you. If you pay one point ($1,000) at closing for a 30-year, $100,000 loan at 6.875 percent instead of taking a no-point loan at 7.25 percent, you'll save over $8,000 in interest costs in 30 years. If you sell the house in 3 years, you'll save only $900, $100 less than you paid for the lower interest rate.
Lenders may offer six or seven different loan products that fit your financial situation, each with a no-points option. If you're serious about shopping, you'll need a calculator or computer that does loan computations and about 40 hours to gather information and figure out what it all means. But don't feel badly if you want to skip the math and make your selection by throwing darts at rate sheets pinned to the wall. Don't even worry if you want to choose your lender for no better reason than its ATM will allow you to make mortgage payments at 2 a.m. on Saturdays.
It's Kidder's Second Rule of Home Financing that every mortgage shopper will feel unequal to the task at hand. by CNB