I can hear it now “OH MY GOODNESS WE ARE IN FOR ANOTHER CRASH” or “HERE WE GO AGAIN”. Interest Only loans make a comeback in Pensacola Real Estate. Well maybe comeback is a strong word let’s call it a resurrection with better features and criteria. So before we go off the deep end or hide under the graffiti bridge for the sky to fall let me explain.
This product was always supposed to be a niche product for a certain clientele. Let me give you the ideal client. A business owner who has to invest a majority of their capitol in their business for the expansion that is under way over the next 5 years. They want to buy a property as well. An interest only loan would fit perfectly as it would TEMPORARILY lower their payments for those 5 years necessary to grow their business. Then the borrower would be able to pay a higher amount because the business has grown.
WHY THE BAD NAME
In the go go days of real estate borrowers, brokers, and banks (sharing equally to blame) were getting these interest only loans to afford more of a home. The thought process was “I can afford more of a house this way…and….we all know real estate always goes up in value”. The trick here was the qualifications were based on the interest only payment to qualify with a debt to income ratio. The problem was that when these loans reset many borrowers could not afford the new payments
The new guidelines have a few ways to bring this product back to the NICHE it is supposed to be. Yes we are going to have adjustable rate mortgages that will adjust to a “presumably” higher rate in 5 or 10 years. This is when the interest only period will come to an end. The new guidelines though require the borrower to qualify for the adjusted payment. Meaning they must qualify for the full principal and interest payment with only 20 years left (assuming they went 10 years interest only).
Next, a borrower is going to have to put down at least 20%. This was the other downfall in the product. Loans were given interest only for 100%+ financing. I cannot say it will always stay at 20% down payment required, but as I write this blog post that is the requirement.
Finally this will require a higher credit score. The companies I have seen doing these loans have been looking for a minimum score of 720 to qualify. This is drastically different than the 620 scores I was seeing in 2006
This product is good for the marketplace. I know that is a strong statement, but ever since the crash I have seen lending pendulum swing so far conservative that it is frankly refreshing to start to see some common sense lending come back into the marketplace. With the current guidelines I am seeing it does not look like this product will take over the marketplace (this is a small niche). I definitely do not see this product leading the charge to hyper-inflation of the real estate prices, rather helping a small subsection of borrowers afford the opportunity again to buy a property.