BY LU ANN FRANKLIN, Times of Northwest Indiana Correspondent
Region mortgage applications seem to be on the upswing as interest rates drop and more customers seek to refinance existing mortgages, local bankers say.
But borrowers face more stringent criteria for obtaining loans than they faced prior to the meltdowns of the lending industry and the economy.
While the low mortgage rates create opportunity for some, those in danger of foreclosure still are sidelined, and defaults are expected to keep rising.
Interest rates for conventional 30-year fixed mortgages are in the range of 5 percent to 5.5 percent, and 15-year fixed home loans can be obtained for as low as 4.75 percent with top credit scores, said Chris Kelleher, vice president and branch manager of DeMotte State Bank's Cedar Lake branch.
"I've had more inquiries concerning rates recently," Kelleher said.
At Centier Bank, mortgage applications have nearly quadrupled in the past two weeks, said Jack Barkley, director and vice president of residential lending at the bank.
"We're definitely seeing an increase in refinancing," Barkley said. "These are not applications for new home purchases."
The same is true at First Financial Bank of Schererville and Crown Point, said David Callahan, mortgage loan officer.
"About 70 percent of our mortgage applications are for refinancing and 30 percent for new purchases," Callahan said.
Refinancing a current mortgage allows some borrowers to take cash out of their homes' equity to pay down higher interest rate debt such as credit cards, said David Rose, of Horizon Bank in Valparaiso. Some aren't tapping the equity but want to lower their monthly mortgage payments through refinancing, he said.
"The homeowner wants to reposition himself," Barkley said.
Although refinancing is the current focus of mortgage applications, some bankers said they hope low interest rates eventually will attract more mortgage applications for home purchases.
"If the rates continue to be low, that will help bolster the purchasing sector. Hopefully we will see people want to buy new homes," Rose said.
The historically low interest rates "will stay low through 2009," Barkley predicted. "This should stimulate home sales of existing homes come spring and help throw us into recovery."
But the lending rules have become more stringent.
Income now needs to be more thoroughly documented before applications can be considered, Kelleher said.
And borrowers need higher credit or FICO scores than in the immediate past. A score of 620 used to qualify borrowers for the best interest rates on mortgages. Today a rate of 680 doesn't necessarily count for the lowest mortgage rate, Callahan said.
"A good FICO score today is 720," he said.
A lower credit score will mean the borrower pays more for the loan, Kelleher said.
"If we have 'customer A' with a 750 credit score and 'customer B' with a 680 credit score, 'customer B' will have to pay more points to obtain the lower interest rate," Kelleher said.
Rose said a special government-backed FHA mortgage still is available with credit scores above 550, although borrowers may have to pay more for the loan.
To refinance a mortgage, there needs to be adequate equity in the home to cover the new loan amount, Kelleher said. Equity is the market value of the home minus the amount owed on the mortgage. With home values declining, the amount of equity available may be less than anticipated, thus keeping many who desire it from refinancing.
In addition, new lending guidelines at some banks allow only 80 percent of a home's value to be refinanced.
"We used to aggressively pursue 95 percent loans," Kelleher said. "Those days are gone."
Another new requirement is "debt-to-income ratio." Debt includes credit card payments, car loans, homeowner's insurance, real estate taxes and home mortgages, Callahan said.
"We used to be able to loan with a 60 percent debt-to-income ratio. Now it's 45 percent," he said.