As interest rates rise, mortgages get creative

A combination of post-pandemic cabin fever and a 75% reduction in new mortgage applications drove thousands of Southern California mortgage loan originators with nothing but time on their hands to the recent California Mortgage Expo in Irvine.

It was so surreal, it felt like I was part of an ant farm.

Amid all the people and speakers, I was struck by how creative and aggressive lenders have become in solving the income puzzle for homebuyers. The region’s median home price has risen $105,000, or nearly 17%, since March 2021. And mortgage payments have steadily risen, too, jumping to a record-high $2,738 for the median home price of $735,000. That’s an increase of 8.8% in a month and 31% in a year.

As Freddie Mac’s fixed mortgage rates soared to 5.3% as of Thursday from 3.22% in early January, rate reduction refinancing is all but gone. As the Mortgage Bankers Association reports an uptick in application volume, I suspect there are many preapproved homebuyers who still can’t get under contract, and many mortgage borrowers are going nowhere fast.

Here are some of the alternative mortgages and incentives lenders shared at the expo …

Certainly, the most aggressive loan program I came across was a way for self-employed borrowers to income qualify using the most recent three months of business or personal bank account statements to qualify. The program adds up three months’ worth of deposits, including transfers from other accounts, and divides that by three.

Barring a good CPA letter explaining lower business expenses, most business owners will have to take a 50% haircut to cover overhead expenses — should you use business bank statements. For example, say your most recent three months of business deposits and transfers added up to $300,000. Take 50% of that ($150,000) and divide by three months. Qualify