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Creative possibilities

Houses in western Nevada County aren’t getting any cheaper, but people are finding more creative ways to purchase them.

Low interest rates for mortgages have offset the rising price of existing housing (the median price in western Nevada County was $380,000 in August), and some exotic new mortgages are helping buyers handle the monthly payments more easily.

In fact, house buyers are beginning to resemble people shopping for a new car.



“Most of our buyers are payment buyers,” said Phil Ruble, owner of Olympic Mortgage and Investment Co. in Grass Valley. “It’s not about the price. It’s about how much can I afford as a percentage of my income.”

Lenders, banking on the continuing appreciation of real estate, are responding to the trend by loosening income requirements and designing a variety of loan packages that require little or no down payment.




This, in turn, has inspired cash-rich investors from the state’s metropolitan areas to invest heavily in residential real estate. Investment properties that used to require a 30 percent down payment can now be had for 5 percent down.

“There’s kind of a frenzy to own real estate and to own as much of it as you can,” said Suzanne Voter, owner of five Delta Home Loan offices in the west county. “We have some investors who are probably buying a home every two months as an investment, with 5 percent down.”

The California Association of Realtors calculates that just 18 percent of households in California could afford a median-priced home of $469,170 in June, down from 27 percent a year ago.

That puts significant pressure on first-time home buyers who face the prospect of a $400,000 starter home, but buyers and lenders are getting more creative at making it happen.

“We see a lot of 100 percent programs using interest only payments … to get (first-time buyers) into a home,” Voter said. “They put a lot of stock in the possibility of the home’s value going up.”

Such deals often involve a piggyback loan, where the lender issues a first mortgage that covers 80 percent of the property’s value and a second mortgage for the balance.

“The second will carry a higher interest rate but the blended rate will be relatively attractive to the buyer,” Ruble said. “But you have to have credit scores that are very good.”

Ruble, whose firm deals with about 65 lenders, said many banks are loosening income requirements for mortgages. Traditionally, lenders have required that a mortgage payment consume no more than 35 to 40 percent of the borrower’s monthly income.

“There are instances when certain lenders will go up to 50 percent, and that’s an all-time high,” he said. “The lenders have made a determination that the equity … in the homes is going to be improving each year, and so they can afford to take a risk in terms of a borrower.”

While conventional 30-year and variable mortgages are still around, lenders continue to develop more creative loan packages. Banks are betting that real estate values will continue to rise, and borrowers are planning to refinance or sell their purchases in a relatively short period of time.

“People have become very creative over the last couple of years because of the knowledge they’ve gained through this whole refinance boom we’ve gone through,” Voter said.

In addition to the piggyback, other new loan packages beginning to surface include:

•40-year mortgage, which extends the conventional 30-year fixed loan another 10 years. Monthly payments are lower, but the borrower pays more interest over the life of the loan. The loan is recommended for first-time buyers who aren’t planning to stay in their house for more than a few years.

•Negative amortization, which allows the borrower to pay less than the full amount of interest necessary to cover the cost of the mortgage. The difference is added to the value of the loan.

“It works if you are planning on a very short hold where you fix the home up and sell it for a profit … and you don’t want your payments to choke you,” Ruble said. “Once again, this relies heavily on market appreciation to protect the lender.”

•Flex-ARM, also called “pick a payment,” gives the borrower four payment options: Negative amortization, interest only, 30-year fixed and 15-year fixed.

“This is an ideal loan for people who have fluctuating incomes,” Ruble said. “In months where you might be short on income, you might want to make the negative portion of the payment or the interest only. The next month you might do well, so you may want to make the 15-year amortization payment.”

•103s and 107s “are designed to not only finance 100 percent of the purchase price, but to finance in closing costs and to consolidate credit card debt into a lower monthly long-term payment so the borrower can afford the whole thing,” Ruble said. But these loans go to borrowers with good credit ratings.

Most of this flexibility comes at a higher price, generally from .5 percent to 1.5 percent above the lowest available mortgage rates.

So what should a first-time home buyer do in today’s overheated market?

“In the long pull, it’s not going to get any cheaper,” Ruble said. “You may see dips in the market, but timing those dips is very difficult.

“So my advice to anybody who is looking to get into a home is to find any way you can to do it.”

Housing Affordability index

Percentage of households in California able to afford median-priced homes

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Pluses/minuses of new loan packages


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