Look to the Past For Solutions

What kind of financing is possible for home buyers and sellers worried about rising mortgage rates, Wall Street bond-market jitters and soft home prices?

Plenty. Although certain aspects of today's post-boom marketplace may look scary on any given day, most of the traditional problem-solving tools of real estate finance are still at your disposal, whether you're a buyer or a seller.

Interest rates of 6.75 percent and higher need not be deal-breakers or impediments to buying or selling. Just talk to experienced mortgage and real estate professionals who have worked through periods of double-digit and high-single-digit interest rates and falling prices in the 1980s and early '90s. You will get some valuable perspective.

"We're headed back to a more normal cycle" after the feeding frenzies of the boom years, said Paul E. Skeens, owner of Carteret Mortgage's branch in Waldorf. "The crazy stuff may be gone, but the old solutions still work great."

For example, for home buyers with limited cash and borderline credit who might have signed up for a zero-down subprime mortgage two years ago, Skeens recommends a program available nationwide through mortgage investor Freddie Mac. It's called Home Possible and comes in several variations, including the zero-down-payment Home Possible 100. According to Freddie Mac's Web site, the program allows seller contributions of up to 3 percent of the total cost and does not require any set amount of financial reserves by borrowers. The maximum loan amount is $417,000.

However, unlike the razzle-dazzle, stated-income underwriting at the height of the housing boom, the program requires applicants to qualify through its traditional Loan Prospector automated underwriting system. This means that borrowers generally need credit scores of 620 or higher and must be prepared to verify income and employment. For applicants with nontraditional credit histories that cause artificially depressed credit scores, Freddie Mac will accept old-fashioned manual underwriting and will also look at nontraditional credit records such as rent payment histories and utility payments -- a key feature for young first-time buyers with slim credit files and people with little banking experience.

Skeens is also bullish on the oldest mortgage program around -- Federal Housing Administration-backed loans -- especially for those who are refinancing out of less consumer-friendly mortgages. If Congress passes pending legislation allowing zero down payments and 40-year terms, "we'll be doing a lot more FHA loans for home purchasers," he said. FHA loans require 3 percent down payments, as well as employment, income and asset verifications. Unlike subprime loans, they come with lower rates and no prepayment penalties.

Sellers and buyers should also be looking closely at another time-tested technique -- rate buy-downs. James Svinth, chief operating officer of LendingTree in Irvine, Calif., said his firm is seeing more transactions in which sellers subsidize the rate on the buyers' mortgages for the first two to three years instead of an upfront payment by the seller to the lender.

The underlying mortgage can take almost any form -- fixed-rate, adjustable, interest-only or hybrid -- but the result is the same: The loan rate is reduced to a more affordable level for a period of years as a concession to the buyer.

Svinth said sellers -- and their real estate agents -- should consider advertising the availability of buy-downs to bring in purchasers. "It's a very effective tool, and just about any lender can arrange it."

Still another old-fashioned concept for today's market: seller take-backs or carry-backs. A mainstay of the creative-financing toolbox during the hyper-inflationary periods of the 1980s -- when conventional mortgages for buyers with good credit topped out at more than 15 percent -- seller take-backs are deferred-payment notes offered by sellers on attractive terms to help buyers swing the deal.

Properly structured and documented by experienced lawyers or investors, take-back notes are saleable for cash in the private secondary note marketplace. Sellers can also hold on to them as win-win investments, pocketing steady income. A sign that this form of private financing may be poised for a big expansion was the acquisition by billionaire Richard Branson's Virgin Group of CircleLending, a privately held company in Waltham, Mass., that specializes in intra-family and seller take-back financing.

Sir Richard is not known for drilling dry holes, so maybe it's back to those old-style concepts -- but on a much larger scale.

Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.