Real estate bargains abound, as we wrote last month — provided you can find financing. Funding your home purchase remains challenging in the wake of a financial market meltdown, even after federal bailouts for the banking industry.

Ranch & Coast spoke with mortgage market experts to find out what’s new — and what you should know before applying for a home loan. The market is especially challenging for self-employed individuals and those without hefty down payments — though there are some options.

“We’re living in one of the tightest credit markets we’ve ever seen,” says Sean Barry, sales manager at Bank of America in Del Mar. “Banks do want to lend, but they do require more documentation now. That’s definitely more painful for the borrowers, but if they can get through to qualify, they can definitely get some great programs right now.” He adds, “The highlight is that we have a full range of loan options available, from more conventional 30-year fixed-rate programs to shorter-term, fixed programs which are more risky, but the rates are better.”

Across the board, interest rates are at historic lows. Rates for a 30-year, fixed conforming loan are around five percent, while fixed-rate, 30-year loans on jumbo loans is about 5.8 percent. In San Diego County, a conforming loan is presently defined as $697,500 or under, while a jumbo loan is over $697,500.    

Adjustable rate mortgages (ARMs) are in the low four percentage rates. “That’s been really good for San Diego real estate,” notes Barry. Qualifying for an ARM is more difficult, however. “People have to qualify for the fully adjusted payment with principal and interest.”

Financing for jumbo loans remains tough in terms of qualifying. The good news is that down payment requirements have dropped to 20 percent, down from 30 percent or more.

“FHA is a prominent part of our financing for borrowers who don’t want 20 percent down. They can come in with as little as 3.5 percent down, and that’s on loans up to $697,500,” Barry discloses. “It’s new this year — within about a year and a half, it’s jumped all the way from $417,000 to $697,000.”  In the past, the program wasn’t often used because other programs existed that allowed buyers to purchase homes with low down payments, but those alternatives are gone, he adds.  

The downside to low-down FHA loans is that you will be assessed a penalty — mortgage insurance premiums mean you may pay up to a point and three-quarters upfront added to your loan amount. “But upfront you can have an additional half point per year, which translates into easily $200 to $300 more per month in mortgage payments,” Barry cautions.

There is good news for veterans. “VA loans really went up. Now you can do a VA loan for slightly over $1 million, somewhere in the mid 90 percent range,” says Barry. “That’s a good fit, and people may not even realize they qualify.”

Overall, he believes the market is now over-regulated, eliminating many would-be buyers. “I think they need to loosen it up a bit.”

Richie Faust, vice president and senior loan officer with Bank of America, says the market hasn’t loosened and that he thinks the high end of the market will drop further. “The one thing that has improved is you can actually get a little more leverage than five months ago,” he explains, noting lower down payments for jumbo loans.  

Faust says most lenders are no longer doing adjustable rate mortgages. “It’s a good thing that they are doing away with those,” he says. “People saw low teaser rates and maybe their mortgage broker didn’t understand how those negative amortization loans work,” he adds, noting that 90 percent of the loans he handles today are five-year or 30-year fixed rates.

“It’s extremely important to deal directly through a bank now, because for the most part, most bankers are more ethical and set a higher standard than an independent loan broker,” Faust says, adding, “I think the business is trying to get rid of the brokers. It’s so difficult for brokers to get anything done now. They just don’t have any power or clout with the bank.”

Matt Battiata, CEO, broker, and lead listing agent for the Battiata Real Estate Group in Del Mar, disagrees — and thinks loan brokers have been made scapegoats for problems caused by stated-income loans, known as “liar’s loans” in the industry. “They looked at whatever you told them you made. They didn’t look at your income tax statements,” he points out. “If you had good credit and money to put down, you could say, ‘I made a million bucks in my Amway business last year,’ and they would say, ‘Fine.’ They blamed mortgage brokers and really it’s not fair. Yes, there was some fraud, but the banks set the guidelines for these loans — and the brokers did exactly what the bankers wanted them to do.”

The market has shifted from too lax to the opposite extreme. “The problem is that there are people who need stated income loans. They are self-employed and don’t show a lot of income on their businesses, and it’s almost impossible to get a loan right now for them,” Battiata notes. He cited as an example a client who wanted to buy a several million-dollar property with 50 percent down and plenty of money in the bank, but he couldn’t get a loan due to stated income. Another client owned a property outright worth at least $750,000. “He wanted to pull out $150,000, but not a single bank would do it.”

Faust offers this advice for self-employed borrowers. “If you write off a lot on your taxes and don’t show a lot of income, you probably won’t qualify. Talk to your accountant or CPA if you think you plan on buying a home in the next couple of years.” Self-employed people should also keep enough money in personal and trust accounts, since many banks are not allowing business funds to be used for down payments and reserves. “If someone is self-employed and has all their money in business funds, they are going to have an extremely difficult time getting financing,” Faust says.

Battiata recently went to Washington, D.C. to lobby San Diego’s congressional members and California senators to bring back stated income loans. “If you look at Fannie Mae and Freddie Mac loans, those with the highest degree of failure are zero-down loans. They’ve got no skin in the game,” he says. Some politicians were sympathetic, but others were not, with many insisting that any new programs would rely on voluntary participation by bank. “They said, ‘Free market; we can’t tell banks what to do,’” Battiata recalls. “I said, ‘Yes you can. You’ve given banks billions of dollars. If they don’t want to listen, they can give that back.’”

Problems stem from the federal government making ill-structured bailouts of banks at taxpayers’ expense, Battiata believes. “Blame for this has to lie with the previous administration because that’s when it went through. They were not clear with these banks that when we give you this money, you’ve got to lend it out to people.” Instead, some large banks used bailout funds to take over smaller competitors, he says, citing JPMorgan Chase’s acquisition of Washington Mutual as an example. “I think the Obama administration is trying to put some teeth into this and trying to get the banks to lend,” he says, but adds that banks are facing lawsuits and more bailout money is being sought.

Today’s difficult housing market differs from past real estate recessions because interest rates are at historic lows. “The problem is banks’ willingness to lend,” Battiata explains. Asked if the market has begun to recover, he concludes, “I don’t think we’re at the bottom of the market, but there are still some great deals there. We’re close, but we’re not there yet.”    MIRIAM RAFTERY