The differences are dramatic, says Greg Cook, a senior loan officer for Platinum Home Mortgage in Temecula, Calif.
Millennials who watched their parents or grandparents struggle with toxic mortgages, short sales and foreclosure might be reluctant to buy a home and get a mortgage themselves. But in fact, most of those bad old loans are gone, and while real estate is never risk-free, today’s traditional terms, strict guidelines and government-mandated forms can help millennials become safe and successful homeowners.
The differences are dramatic, says Greg Cook, a senior loan officer for Platinum Home Mortgage in Temecula, Calif. “If we go back 10 years, there were so many loan programs and most of them were, pardon my French, crap,” he said.
• Payment-option loans
This old loan was one of the riskiest because it gave borrowers a choice of four monthly payments: a minimum payment, interest-only payment or 15-year and 30-year full amortizing payment, Cook said.
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“It was a problem because almost everybody took the path of least resistance and said, ‘Let’s make the minimum payment.’ As a result, the loan balance got bigger.”
This increase in the loan balance is known as negative amortization.
When house prices depreciated, borrowers found themselves upside-down, owing more than their homes were worth. Many stopped paying and let banks foreclose.
Today, negative-amortization loans are rare, if they can be found at all, because of a federal rule that grew from the housing crash: the qualified mortgage rule.
Lenders get special protections when they make qualified mortgages — and qualified mortgages must be fully amortizing, which means the payment must include enough interest and principal to pay off the loan over the term. Negative amortization isn’t allowed.
• Interest-only loans
This allow borrowers to make payments that include interest, but not principal. When the borrower makes the minimum payment, the loan balance doesn’t increase, but it doesn’t decrease either.
Where many borrowers “went sideways,” to use Cook’s words, with this type of loan is that after a specified number of years, the loan typically is recast and the borrower has to make principal and interest payments to pay it off, but over a shorter term. That results in a much larger monthly payment that caught many borrowers by surprise.
Michelle Velez, a mortgage-sales manager in San Mateo, Calif., says some interest-only loans are available today. They typically require the borrower to qualify based on the fully amortized payment instead of the interest-only one.
• Liar loans
Another type of dicey mortgage was the so-called stated-income loan, which originally was intended to help borrowers who were self-employed and had excellent credit and a large down payment.
Since the borrower’s income was stated on the loan application with little or no verification, borrowers and loan officers often felt free to claim whatever income they wanted.
“They started to reduce the (required) down payment and credit score, and that’s when it became the ‘liar loan,’ ” Cook said
Two types of liar loans with colorful nicknames were the NINA (No Income, No Assets) and NINJA (No Income, No Job or Assets).
Nowadays, virtually all borrowers must provide income documentation, typically W-2s for employees and income-tax returns and financial statements for those who are self-employed.
• Cozy appraisals
Before the 2008 financial crisis and subsequent government regulations and changes in the real-estate business, brokers and agents could pressure appraisers to make sure valuations were never “low,” regardless of the homes’ true values.
“They were coercing the appraiser and saying, ‘If you can’t bring it in at this value, I’m not going to give you my business,’ ” Velez says. “Not everybody did that. But there were people doing 20, 30 loans a month, and if they were ordering all their appraisals with one appraiser, that was a big chunk of income that the appraiser would lose.”
Today, appraisers are kept at a professional distance from brokers and agents to help protect them from this type of undue influence.
• Loan-estimate form
Millennials “grew up in a shadow” of parents who lost a job, struggled with a mortgage and maybe lost a home, says Fred Kreger, certified mortgage consultant for American Family Funding, a mortgage company in Santa Clarita, Calif.
“In the back of their mind, sometimes they think mortgages are evil,” Kreger says.
This, too, could be changing due in part to the new Loan Estimate and Closing Disclosure forms designed, consumer-tested and, as of Oct. 3, 2015, mandated by the federal government.
The Loan Estimate form, Kreger says, “clearly explains everything (borrowers) are getting into, as opposed to in the past when they weren’t necessarily explained to upfront.”