If there's a will, there may be a way

Fourth in a series

As the value of island real estate increases at a steady pace, it has become more of a challenge to buy into the local market.

To a buyer's benefit, however, lenders have become more numerous and competitive of late, allowing potential borrowers to choose from programs across the nation. And, those lenders are likey to recognize the investment that Nantucket real estate represents.

Appearance counts

No matter which lender is approached, the first item on the mortgage agenda is checking an applicant's credit record.

Beth Ann Meehan, senior account executive for residential lending at Pacific National Bank, now a division of Bank of America, explained the process. Meehan's bank, and other large financial institutions, will use a more critical eye on credit scores than other banks or mortgage brokers.

Scores range from 400 to 800. Meehan said applicants must have a score of 600 or greater, and for the lowest interest rates, the score should be at least 680.

If someone's score is under 600, that may be because the person has never established credit, and might be asked to obtain a credit card and use it for a few months to show they can handle monthly payments.

The next step is to examine the purchase price of a property. Meehan and others said the island's current market is so inflated that all mortgages are considered "jumbo" loans because $359,650 is the ceiling of a "conforming" loan category.

While some lenders will consider a 100 percent mortgage, the majority want the buyer to have a minimum of 10 percent down payment available, and preferably 20 percent down.

A 20 percent down payment eliminates the requirement for private mortgage insurance, which carries a monthly premium according to the loan amount.

Provide some proof

Lenders will also ask to examine wage stubs or a couple of years of self-employment tax returns as proof that an applicant's income is adequate to cover the payments on their requested mortgage.

Using a $700,000 purchase price, under the 80/20 percent formula, the down payment would be $140,000 and the loan would total $560,000.

At the present six percent interest rate on a 30-year fixed loan, the monthly cost would be $3,358. Add to that an approximate $200 monthly property tax bill and $150 monthly homeowners insurance premium and the amount due would reach $3,698.

"This is the sticker shock," said Meehan. "This is where it gets scary with a house of this price. That's higher than rent. The 'slam dunk' [of applicants able to comfortably make this payment] does not happen often with year-round residents. You need to make about $110,000 a year to give a 40 percent debt to income ratio."

Meehan explained that the interest payment rate can be reduced if applicants agree to putting "points" on their loan, which is an amount equal to one percent of the mortgage.

Using the $700,000 example, a point would be $5,600. Points are due at the time the loan is closed, and Meehan said most first-time buyers cannot use the point system because they need all the cash they have for the initial and regular payments.

Addressing empty pockets

Bank of America has several programs that benefit first-time buyers. However, they are only available for the conforming loan amounts which have essentially disappeared with the island's rising real estate values.

Notwithstanding present property prices, Meehan, along with other lenders, tries her best to find a way to grant a mortgage to people with limited assets.

Most applicants do not have 20 percent of a sizable mortgage to deposit, and may have other debts beyond what a loan commits them to.

Meehan said she tries, in those cases, to juggle the numbers and see if they can put down 10 percent. That might be possible for a home in the $700,000 to $850,000 range, but it entails a second mortgage for the remaining 10 percent down payment.

"That can be expensive, because the interest rate on a second mortgage is commonly higher than the first mortgage rate and amortized over a shorter period, like 20 years instead of 30 years," Meehan said.

In this scenario, a second mortgage at seven percent may cost $543 monthly on top of the first mortgage, property tax and insurance, for a total monthly expense of $4,251. This applicant, having no additional debt, should earn $128,000 a year, roughly $10,028 in monthly gross take-home pay. That equation leaves the person 60 percent of his or her income for personal taxes, food, utilities, clothing and all of life's other costs.

"There are a lot of people, because of their credit report showing debt, who will need more income, like $150,000 to $175,000," Meehan continued.

That population may be able to obtain a no income verification loan however, the interest rate will be greater, perhaps six and a-quarter percent, and, at her bank, they still must make at least a 10 percent down payment and have a 680 credit score.

Meehan said no income verification loans became more prevalent about five years ago, and because of competition between lenders, also became more reasonably priced.

"Because real estate across the country has gone up, there are [now] more people who don't qualify [for standard loans] than people who do," she noted.

Just last week, Bank of America began what it calls the Equity Maximizer Combo offering a 100 percent financing loan. It requires first and second mortgages for a 30-year term, but can go up to $1 million, even without income verification. While applicants for this program still need a 660 credit score, it is one more method available to get new buyers into the market.

Meehan said that it saddens her when a community's school coach, teacher or nurse want their own roof over their head, but are unable to meet mortgage guidelines.

"It can be an extremely difficult and heart-breaking thing when you can't get them there," she said of her job.

A familiar face, a familiar dilemma

Julie Bell is vice-president for residential lending at Nantucket Bank, now a division of Sovereign Bank.

Using data collected by The Warren Group, Bell listed Nantucket county's top six lenders: Nantucket Bank, Washington Mutual, Fleet Mortgage, Wells Fargo, Country Wide Home Loan and Bank of America.

Bell recently celebrated her 25th year with the bank and knows how vital it is to have community-based lenders who work loan possibilities every which way to assist residents.

She explained that for islanders, Nantucket Bank will do "creative financing," but still requires a loan application and credit report, the last two years of income tax returns for self-employed people and current pay receipts for salaried individuals.

Though the bank's clients now tend to be second home buyers, she recalls that when the recession hit in the early 1990s, a lot of customers were first-time buyers who could purchase land for $75,000 and only needed to borrow about $150,000 to build a home.

At that time, and into the present, Nantucket Bank allows for "sweat equity" in considering mortgages, where someone with carpentry, painting or other trade abilities can perform some of their own work, and thereby need to borrow less.

In the current market, $1 million mortgage loan requests are not uncommon, with applicants needing $500,000 for a lot and another $500,000 for construction of a 2,500 square-foot family home at an estimate of $200 per square-foot for labor and materials, said Bell.

For this amount, the bank wants to see 20 percent down and give an $800,000 loan.

At a 5.625 percent interest rate on a 30-year fixed mortgage, the cost to borrow $800,000 would be approximately $4,605 a month plus another $250 for property tax and insurance.

That means this applicant should be earning $176,000 per year, or roughly $14,700 a month to qualify. The formula allows for 28 to 33 percent of the person's gross monthly income to be devoted to the loan payments.

As of June 30, Nantucket Bank had 25 loans for residential purchases in process, for a total of $21 million. Bell said the average loan amount within that lot is $840,000.

One size does not fit all

"We do allow a person who can't qualify alone to come in with a co-signer," explained Bell. "That often happens, especially with first time home buyers. Lately, I see the year-round people buying a duplex that is a condo for $400,000 to $600,000, and for the first time buyer, the bank will lend 90 percent."

Other loan programs through Nantucket Bank include adjustable rate mortgages, which other banks provide but can be risky for both the lender and borrower if rates go up beyond what a person can afford.

Nantucket Bank also has a fixed, three-year mortgage that then becomes a one-year adjustable; a fixed, five-year mortgage which becomes a one-year adjustable; 15 and 30-year fixed rate plans; a no point, six percent or 5.625 percent with one point, jumbo fixed loan; or choosing a fixed rate paying only interest for the first 10 years.

Bell said the bank does not approve no income verification loans at this time; however it is under consideration because of the competitive lender spectrum.

Looking at the costs on a mortgage of $2.5 million for a house costing $2.8 million, which is becoming a more typical number, Bell said the down payment would be $280,000.

Using the six percent, 30-year fixed rate, the monthly payment would be about $15,000 plus property tax and insurance at around $350 a month. To qualify for a loan of this size, an applicant must show he or she has $560,000 in annual income from all available sources, not restricted to job earnings.

"It is important to know that we look at every criteria - I don't just go by numbers," said Bell. "We are the local lender, and we try to help the local people as much as we can. If a loan payment exceeds 33 percent of monthly income, that doesn't necessarily mean you don't qualify.

"We consider lending based on all other income sources that might not be verified through tax returns," Bell added. "The local bank wants to look at the whole profile of the borrower. Sovereign has allowed Nantucket Bank to remain independent of its lending department. The loan decisions are directly local on all our loans."

The best deal - a bank or a broker?

Seth Gottlieb is a licensed mortgage broker with Brant Point Mortgage. The difference between using a bank and a broker is that the broker is not the lender, but rather finds funding for loans through investors.

Sometimes, this provides for more varied loan products. Gottlieb is a long-time resident who understands, as do the island banks, how difficult it can be to buy into today's real estate market on Nantucket.

"Buying land and building is not necessarily less expensive than buying a house now," said Gottlieb. "Unfortunately, that is presenting a challenge to young people on Nantucket. Either way they go, it's going to be pricey for them."

The lenders to Brant Point Mortgage commonly offer loans without income verification, but still have underwriting guidelines.

Brant Point Mortgage will issue 100 percent financing. However, an applicant for that type of loan must be able to show a good financial profile and understand that the loan will involve a first and second mortgage. Further, those loans only apply to existing homes because of the risk involved with building.

Gottlieb explained that sometimes there are escalations to originally anticipated costs to build, and if a client asks for too many changes during the construction process, a builder may walk off the job before it is finished.

"There are just too many things that could go wrong, and that puts [a building project] at hypothetical risk," said Gottlieb. "Lenders don't want to foreclose on a house that's half built. And many times, lenders want to qualify the builder, not just the borrower, to see that the builder is reputable and will complete the project. In my experience, construction loans are not the strongest product."

On loans for existing homes, Gottlieb offers competitively rated loans to meet individual financing needs, yet said the same thing as his peers in the lending world - credit history is one of the most important components of borrowing money.

And he, as with others, wants to see proof that there are some reserve funds available to the applicant, such as a 401K or savings account, that could be tapped to cover mortgage payments if a person loses their job or has some other costly life crisis.

Still, he added that brokers can offer loans to applicants with poor credit who are turned down by a bank.

It's not so much whether you should go to a broker or a bank, you should just do your homework and see what options are available to you through various sources," said Gottlieb, who said on Nantucket, brokers and banks refer one another if a particular office is unable to assist an applicant. "See who has the product to meet your financing needs. The ultimate goal is to help the person get the home they want or the refinancing they need. We do what we need to do to help the borrower."

More possibilities

Dave Nommensen is with American Home, a bank with branches across the country. Though his office is in Hyannis, he said he makes frequent trips to Nantucket to discuss mortgage options with potential island clients. He said American Home ranks eighth in the top lenders for the nation.

Nommensen is a knowledgeable man who will take time to talk over financing options through his bank and even dispense advice, however, the need for decent credit and reserves to fall back on continue to be an essential part of the loan discussion.

"Keep in mind, loan to value," said Nommensen, explaining that his bank will go up to an $8 million residential loan. "If you want to borrow $1 million, my company could lend 80 to 85 percent on a first mortgage with a 15 or 20 percent down payment, but you need to put down more money as the loan amount increases. On $8 million, you need to put down 50 percent on a first mortgage. If you are looking at a $16 million-dollar home, you probably have the money to pay for it. My clients are a mix of the self-employed, professionals and people with liquid assets from stocks."

In the $1 million and higher loan range, he said the six percent fixed, 30-year mortgage will carry the greatest interest rate over the term of the loan.

The same $1 million mortgage at a one percent, adjustable rate, would be roughly half the monthly payment if most of the loan is paid in an approximate five-year period.

Though adjustable rate mortgages are an option for those who cannot pay cash or find the fixed rate too high for them, adjustable payments can "creep up" on people, Nommensen cautioned.

"There is no free lunch in any of these," he said.

Per million, at a one percent adjustable rate, Nommensen calculated that, excluding property tax and insurance, monthly payments on the loan would be about $3,200 for interest and principal.

If the applicant pays 20 percent down, the same financing on an $800,000 loan would equal $2,600 a month for principal and interest. With 10 percent down, monthly principal and interest would be $3,150 because a second mortgage would be necessary.

"But there are risks. How fast can you pay off a second mortgage, and how often could the second mortgage rate change?" Nommensen pointed out. "This is a loan you pay attention to. The risk/reward program mechanism is a way to get into the first house, and it is a good vehicle, but I don't recommend keeping the loan for long-term. It is a foot in the door, but try to get [the second mortgage] paid in five years or refinance. As the house goes up in value and you are paying down the loan, you get more equity in [the property] and can refinance at a fixed rate."

American Home will also consider 100 percent financing, but does not recommend it because of the risks to both lender and borrower. And Nommensen, too, spoke of the competitive lending choices available to people now, suggesting that home buyers shop around and find the best deal they can.

"There is a lot of opportunity to get a mortgage these days. It's whatever your preference is," he said. "Bank to bank, the rates are nearly identical, but the difference in lenders is with their guidelines and profit margin. And run from points - points are nothing more than pre-paid interest."

Believe it or not

In profiling loan amounts and payments, The Independent has not gone past the high $2 million mark because people who can afford a home or land more expensive than that are generally able to pay out of pocket.

"Right now, the number one competition for mortgages is cash closings," said Meehan, who said the largest residential mortgage loan she has given in recent times was for $2 million. "If the house is more than $2 million, the majority of buyers are paying cash. Why would someone buying a $10 million house have eight million of their own and need a mortgage for $2 million? They have it all.

"The $2 million or under loans are to people who have been able to save money for a down payment and are not afraid of a $4,000 monthly payment because their business is good," Meehan added. "They are the general contractors, the painters, the landscapers, the architects. They are the laborers for the hyper-rich."

Buying real estate, 101

Meehan said she has offered credit counseling to applicants, showing them how they can improve their standing, sometimes in just a year.

She also recommends attending the annual, three-night Homebuyer Education seminar hosted by the Nantucket Housing Office and sponsored by Pacific and Nantucket banks that teaches new-comers to the market about credit and borrowing options.

"If you don't own now and you are thinking about it here, or elsewhere in the future, look at your credit score and find out where the blemishes are and how to fix them," said Meehan.

The next Homebuyer Education seminar will be held on Oct. 18, 19 and 20 from 6 to 9 p.m. in room 104 at the high school. These sessions are free. The first evening will be devoted to the financial aspects of buying real estate on Nantucket.

The second evening will address legal aspects of a purchase. The last night will focus on purchase programs specific to the island, including the Nantucket Housing Office's covenant program allowing income-qualified buyers to purchase a property owner's second dwelling residence at affordable, off-market rates. Pizza will be provided by the banks. Call the housing office at 228-4422 to register.