Juicy Estates: Mortgage Blog

Wells Fargo Lowers Down Payment Requirement…More To Come?

In the first relief that we have witnessed since the inception of the mortgage crisis more than 18 months ago Wells Fargo has reduced it’s down payment requirement in one instance.  While I don’t expect this to be the first in a steady stream of relaxed underwriting guidelines it is the first significant sign of a thawing credit market and foretells of more stable housing numbers ahead.

Many of you are familiar with the term “combined loan to value”  which is more commonly referred to as CLTV.  This term refers to the combined amount of a first and second mortgage relative to the value or contract price or appraised value of a home.  During the period of 2000 through 2007 second mortgages in the form of equity lines of credit were used in a variety of ways.  When used responsibly this first and second mortgage structure could provide for lower down payment,  lower monthly payments and greater tax deductions for home buyers.

For Example:

With a contract price and/or appraised value of $695,000 a buyer may choose to use a first mortgage of 60% of the value of the property and second mortgage for 10% of the price/value of the property and a 30% down payment.  In this instance the combined loan to value or CLTV would be 70% (1st mortgage of 60% + 2nd mortgage of 10%).

We may use this structure as in the example above so that the buyer can have a first mortgage at the conforming loan limit of $417,000 which will offer the lowest interest rates.  Currently a 30 year fixed rate in this example for a well qualified buyer would be about 5% with no points and 15 year fixed rates are about 4.75%.

Since the mortgage crisis started most lenders have stopped offering second mortgages in the form of equity lines of credit and those that do offer them, like Wells Fargo have capped the CLTV at 70%.  Several major national banks currently offer these second mortgages but only to 60% combined loan to value.

In the first move to relax down payment requirements Wells Fargo will now offer up to a 80% combined loan to value for well qualified clients when the first mortgage product is a 15 year fixed rate mortgage.  This relaxed down payment requirement is applicable across the country and even here in South Florida.    There are a lot of smart people at Wells Fargo and the thinking here is that we are close to the end of the downward pressure on real estate values and that a 15 year fixed rate mortgage will amortize more quickly than property values will drop.

Of course if you are using just a single loan you can still put as little as 3.5% down through FHA, no money down through VA and just 10% down through conforming loan programs.  For a comprehensive outline of down payment requirements see my post of November 21 2008 by clicking here.

As a Private Mortgage Banker I am asked several times a week to make a projection about when will we see that steady stream of relaxed underwriting guidelines.  The fact is that no one knows but I imagine that we will have to see 3 or more consecutive quarters of stable or improving property values before we see significant across the board relief.  That being said the underwriting guidelines of today are similar to those of the mid 1990’s and are by no means unreasonable.

This entry was posted on Monday, March 9th, 2009 at 9:57 pm and is filed under Home, Mortgage News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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