John Dunn

Recent home buying trends are showing that there are more home loan applications right now than there have been in the past few months. Along with that rise in home loan applications, interest rates on home loans have dropped below 5 percent on a 30-year fixed mortgage, according to one industry group.

The increase over the past few weeks marks approximately an 8 percent increase in mortgage applications since the previous year. This is good news, as the housing market around the country has been hit pretty hard during the current economic crisis. This increase suggests that the housing market is starting to stabilize, after having been in a slump for the past three years.

Still, there is always the possibility that we may not be entirely out of the woods. Some argue that the government programs, such as the new home buyer credit, have propped up the market, and that the market will turn sour again once the program expires at the end of November. There is talk in Washington of trying to extend the program well into 2010.

The rise in the past few weeks comes on the heels of an unexpected rise in the sale of previously owned homes in September, according to statistics provided by the National Association of retailers. Previously owned home sales were at their highest levels in three years, in part because consumers are scrambling to meet the November 30 deadline.

In addition to the new home buyer tax credit, there are other factors that have contributed to the rise in new home loan applications, as well. Not the least of these is the drop in interest rates.

Along with those new home applications, rates have dropped significantly. The average rate on a 30-year fixed mortgage was 4.97 percent at the end of October. While this was still higher than the low of 4.61 percent set in March of this year, these rates are well below the 6.47 percent average of just one year prior.

Refinancing is also increasing, by almost 15 percent in October. These low interest rates are, at least in part, responsible for the increase in refinancing loans.

One of the unfortunate facts about the home buying market is that there are scam artists and frauds who seek to prey on folks just trying to buy a new home. While not all forms of mortgage fraud affect home buyers, there are some that do. In addition, there are some cases where a home buyer has to be careful they don’t accidentally break some of the mortgage rules, thereby breaking the law themselves.

During 2009, mortgage frauds have been on the rise. In April 2009, for example, there was double the amount of mortgage frauds that there were in April 2008.

Here are some examples of mortgage fraud cases that have come out over the past year or so:

• Many cases involve mortgage brokers one broker in California originated more than a billion dollars in fraudulent home loans in six states, including Colorado. The man tried to flee to Canada, and was stopped at the border with $70,000 cash stuffed in his boots.
• Some brokers have stolen identities to originate mortgage fraud. Another broker in California used the social security numbers of 25 children to originate loans.
• One woman in Maryland originated $30 million in fraudulent mortgages. She used the money to pay for her wedding, which cost nearly $800,000, and featured music by Patti LaBelle.
• There were smaller cases of mortgage fraud, too. A bank vice president from Minnesota forged her husband’s name on a $200,000 home loan, for example.

Not all mortgage fraud involves brokers, however. Thousands of cases are investigated each year of mortgage fraud involving regular homebuyers. Some of the most common causes of homebuyer mortgage fraud include situations such as:

• Undisclosed Kickbacks. If in the process of closing a mortgage you gain monetarily in a way that your lender doesn’t know about and that isn’t included as a part of the loan agreement, you might be guilty of mortgage fraud.
• Falsifying Income Records. This is especially common among self-employed individuals, and giving a false number constitutes mortgage fraud.
• Occupancy Issues. If you buy a home and receive special terms based on the fact that the home is your residence, yet you don’t live in the home, you may be guilty of mortgage fraud.

More and more, new home buyers are taking advantage of the FHA-insured home loan options. These loans are insured by the Federal Housing Administration, and have some very specific benefits for home buyers.

The principle behind the FHA home loan is to be able to help families of moderate to low income level become homeowners. The FHA home loan accomplishes this by reducing some of the costs involved. In addition, the loan protects the lender, and encourages the lender to make loans to potential home buyers who might not qualify using conventional underwriting metrics but that still have good credit.

FHA home loans are designed to get families into homes with very little cash out of pocket. However, there is talk in congress that this may change. One bill would change the amount that a buyer is required to put down as a down payment. Currently, FHA home loan borrowers can buy their home putting down 3.5 percent and closing costs can be wrapped into the loan. The bill would raise the cost to 5 percent, and prevent buyers from wrapping in the closing costs.

Depending on the situation, this could astronomically increase the amount that a home buyer would need to put up to get their home. It could go as high as ten percent, including five percent for the down payment and around five percent for closing costs.

The bill’s sponsor, Representative Scott Garrett of New Jersey, says that the bill is “is aimed at shielding taxpayers from the risk that the FHA portfolio presents.” Whether or not the bill would accomplish this is, of course, being fiercely debated. Home buyers and lenders alike are waiting to see what happens.

If you’re thinking about trying to get an FHA loan, there are some things you can do to get ready. First, recognize that each lender sets its own terms on loans, so it pays to do some comparison shopping.

You should also recognize that the lender will want to make a decision as to your risk. They’ll look at your credit history and your debt-to-income ratio, just like if you were applying for a traditional mortgage.

You’ll need to have the same kinds of paperwork ready, too. You’ll need employment documentation, and for an FHA loan need to have been employed for two years in the same field. You should be aware of your credit score, and know that it should be above 620 if you hope to qualify for an FHA home loan.

• First, you can use low home prices on foreclosed and short sale homes to add pressure to the price negotiations for your new home. Traditional sellers know full well that they need to be competitive. While you can’t expect to pay the same for a traditional home as you would for a foreclosed home, you can leverage those prices to help negotiate.
• You also need to study your local market. Explore the options available to you. Know how much distressed homes are selling for. If you want to make an offer to a traditional seller, it’s amazingly helpful to have that data. It also opens up the possibility of buying a home that’s been foreclosed.
• Be willing to consider a distressed home, too. There are some limitations in buying a foreclosure, to be sure. The process of purchasing a distressed home can be very different from buying a new home or one that’s not distressed. Spend some time learning about how to buy a foreclosed home, and talk to your real estate agent about the options.
• Understand that, if you buy a bank-owned home, the property is sold “as-is.” You’re not able to negotiate the home price based on certain conditions. You can, of course, create a purchase contract that will be contingent on an inspection, but this doesn’t help you at all with the price negotiation process. It just gives you a way out of the purchase, if the inspection turns out badly.
• There’s no way to know how much longer these foreclosure rates will continue. Most experts agree that we are somewhere near the end of the economic downturn, so if you’re going to take advantage of low home prices that have come about because of foreclosures, you probably need to act sooner rather than later.

For the past decade or more, home loans have tended to be anything but basic. Complex loans, such as those that feature interest-only payments or option Adjustable Rate Mortgages, have been the rule, rather than the exception. The sheer complexity of the home loan marketplace can leave the new home buyer frustrated and confused. In addition, these complex loans are, at least in part, intertwined with the economic downturn in the housing market.

Option-AMR mortgages, for example, allowed the borrower to defer their interest while they made payments on the principal. This worked fine, until home prices began to fall. At that point, payments rose and the deferred interest payments caused many mortgages to increase while the value of the home dropped. This created a huge loss for the lender. Many companies that featured these products, such as IndyMac, Bancorp Inc., Washington Mutual Inc., Downey Financial Corp., Wachovia Corp., and Countrywide Financial Corp. have all folded or been bought out since the downturn hit.

Home lenders, such as Wells Fargo, are realizing that this is a problem, and are offering potential home buyers the choice of a basic, “vanilla” loan. Many of the home loan companies offering exotic mortgage products are closing their doors or at least scaling back, and Wells Fargo sees this as an opportunity. New home buyers need and want simple mortgages that they can afford and that won’t create a great deal of risk either for the lender or for the mortgage company.

Wells Fargo and the mortgage companies offering these vanilla loans aren’t the only ones who support the idea. Many politicians, including the President, support the idea of the vanilla loan. There is even legislation being talked about that would make it so that a new home loan is a vanilla loan, by default. If the home buyer wanted to explore other loan types they could, but most loans would be your standard loan, such as a 30-year fixed mortgage.

In the end, vanilla mortgages will not only help the overall loan market, they should create less risk for home-buyers. Buyers can be relatively sure that their home won’t be worth less than what they owe, even if the housing market should take another dive.