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How this ‘villain’ of the housing crash could be right for you now

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How this ‘villain’ of the housing crash could be right for you now

Qualifying for an ARM today is far different than it was during the housing boom, when really anyone could get just about any loan. The underwriting is actually similar to that of a 30-year fixed loan. Lenders are required to look not only at whether the borrower can pay the fixed rate over the entire term of the loan, but also how much that rate could increase after the fixed period, and if the borrower can afford that. There can be no “payment shock” at the end of the fixed period. The borrower must be shown exactly what all payments will be.

So is it harder to qualify for an ARM?

“In general, the answer is no,” said Bryan Sullivan, chief financial officer of loanDepot. “Mortgage qualification is determined by a homebuyer’s credit score, the loan-to-value (LTV) ratio of the home loan and the customer’s debt-to-income (DTI). ARMs are typically lower priced and also have a correspondingly lower LTV ratio which may make it more difficult for potential homebuyers to qualify.”

How do you know if an ARM is right for you? It really comes down to each individual borrower. Generally, an ARM will allow a homebuyer to buy a more expensive home, since it offers a lower interest rate. It might work well for someone who expects to earn a higher salary in the future, when the rate adjusts higher (rates can also adjust lower, but that is unlikely in this rising rate environment). Homeowners can also refinance when the fixed term of the ARM is over, although rates could be higher at that time as well.

ARMs may be best for younger borrowers, who tend to be more mobile. First-time homebuyers, who intend to trade up quickly, can save a lot of cash using an ARM.

“If interest rates continue to rise, but really as home prices continue to appreciate, I think that you will see more people looking at ARMs when they’re looking to purchase more home,” said Tyrrell.