5 mortgage market insights

The vast majority of homebuyers in the U.S. are also borrowers. Poorly regulated and predatory mortgage lending fueled the real estate bubble. As many pundits have noted since the real estate market collapse, regaining traction has been stalled by lender overcorrection. Thus, the moniker for our recent economic situation: the “credit crunch”.

After nearly six years of severely stunted mortgage lending, lenders are loosening their purse strings once again, according to a recent Wall Street Journal report. Check out these five must-knows about the future of our mortgage markets.

1. Low down payment loans are coming back. True, the 3.5% Federal Housing Administration (FHA)-insured loan never totally went away. But 2008 saw the FHA’s market share balloon to an unsustainable size as FHA-insured loans were the only option for buyers with little savings, post-bust. The share of all non-FHA-backed loans with a down-payment of 10% or less reached a 5-year high last year, according to Black Knight Financial Services.

2. No-money-down mortgages still exist. The VA still offers no-down-payment loans. Veterans can also get special loan privileges through the Navy Federal Credit Union. The USDA insures some no-down-payment loans in certain rural areas. The fact is, however, we ought to be thankful such loans are no longer available to wider public. Having some skin in the game vastly decreases the chances of default and thus protects against another foreclosure tsunami.

3. The return of low-down-payment loans does not necessarily mean another bubble. True, low- and no-down mortgages were the accelerant of the real estate wildfire in the early 2000s. However, it’s important to remember that it wasn’t the lack of down payment alone that led to the mortgage market’s flammability.

The preponderance of loans that went belly up were no- and low-doc loans. New qualified mortgage (QM) and ability-to-repay (ATR) rules ought to prevent another subprime crisis of the same or similar character to the last one.

Adjustable rate mortgages (ARMs) remain a threat to the real estate market’s stability, however. Very little has been done to specifically regulate these products even though the combination of low teaser rates on ARMs and poor financial literacy was a huge impetus for the mortgage crisis. QM/ATR does address ARMs. They are to be underwritten at the maximum allowable interest rate after five years from the date of the first payment. So the ARMs threat has been eased but not neutralized. 

4. Credit standards are easing, but remain tight.Fewer than 0.2% of mortgage borrowers had a credit score less than 620 last year. This is compared to 2001 when more than 13% of borrowers fell below this threshold. The tighter credit score standards means the millions of Californians still recovering from foreclosure and short sale will have a harder time qualifying for mortgage funds. However, the new ATR rules do not include any specific credit score minimums. Thus, lenders may have an opportunity to focus more on an applicant’s ability to repay based on their current financial situation rather than their tainted credit history.

(ATR rules =ABILITY-TO-REPAY AND QUALIFIED MORTGAGE RULE)

5. Mortgages move the real estate market. There would have been around 200,000 more mortgages made in 2012 if credit standards had returned to pre-bubble levels, according to the Urban Institute.

Economists at Goldman Sachs estimate new home sales will rise to 800,000 homes in 2017, compared with about 430,000 in 2013. This increase ought to occur based on improving economic fundamentals such as job growth and household formation.

Borrowing from a 401(k) to Make a Down Payment

Make sure you understand the rules and risks before tapping your retirement savings to pay for a home.

It looks like I’m going to need to take money from my retirement savings to make a down payment on a house. Which is better to tap for a down payment -- a 401(k), a Roth IRA or a Borrowing from a 401(k) to Make a Down Payment.

Your best bet is to tap your 401(k). You can generally borrow up to half of your balance, up to a maximum of $50,000, from the account at any age and for any reason without tax or penalty. The interest you pay on the loan (generally the prime rate plus one or two percentage points) goes back into your account.

Loans from 401(k)s usually must be paid back in five years, but your employer may give you up to 15 years to repay a 401(k) loan if you are borrowing the money to buy a home. Your employer will usually start deducting the monthly loan payments from your paycheck right away.

There is one major drawback to borrowing from a 401(k): If you lose or leave your job, you generally have just 60 to 90 days to pay back the loan or it will be considered a distribution -- and subject to taxes, plus a 10% early-withdrawal penalty if you’re under age 55 when you leave your job.

Taking the money from a Roth for a down payment is your next-best choice. You can’t borrow from the account and return the money to it, as with a 401(k), but you can withdraw up to the amount of your contributions tax-free and penalty-free for any reason and at any age. If you withdraw earnings from a Roth before age 59½, you generally must pay taxes and a 10% penalty; after age 59½, you can withdraw earnings penalty- and tax-free (as long as you have had a Roth IRA for at least five years). But if you’re using the money to purchase your first home, you (and your spouse) can each withdraw up to $10,000 in earnings from your Roth IRAs without the 10% early-withdrawal penalty even if you’re under age 59½. You’ll also avoid a tax bill on that withdrawal if you’ve had a Roth IRA for at least a five-year period. If you don’t meet the five-year test, you’ll owe taxes on that $10,000, but not the 10% penalty.

First-home rules are least advantageous for traditional IRAs. You and your spouse can each take up to $10,000 from your traditional IRAs for a first-home purchase without the 10% early-withdrawal penalty, but the withdrawal is still taxable.

You don’t literally have to be a first-time homebuyer to qualify for the first-time-home buyer exceptions, but you can’t have owned a home in the previous two years. If you already own a home, you can still take the 401(k) loan or withdraw your contributions to a Roth IRA without penalties or taxes, but you won’t qualify for the $10,000 penalty-free IRA withdrawals.

For more information about IRA withdrawal rules, see IRS Publication 590, Individual Retirement Arrangements (NOTE: IRS rules change, please seek the latest rules fro your tax adviser and/or attorney)