Buyer’s Choice Realty blog

As stated in our previous post, there are new restrictions regarding who can actually get approved for a loan. I’d again like to thank Dawn Davis, president of Rate One Mortgage, for her explanation of this issue. As we wrote previously, this will mostly affect potential buyers who do not have a large amount to put down on their purchase. Here are the details, as provided by Ms. Davis.

For those looking for 100% or 97% financing, it will not be available. 100% financing will be reduced to 95%, and 97% financing will be reduced to 92%. In these cases, buyers will need to increase their down payment by 5%. For some, this may not be possible and they may be forced to wait until they are able to save some money. But, for many, there are some alternatives to obtaining the additional funds needed for down payment.

Buyers who are approved for 100% financing and will actually receive 95% financing can use their own funds or gift funds for their down payment. They are not permitted to borrow the money unless they make a loan against retirement funds such as a 401k account. Lenders document gift funds by obtaining a gift letter from the donor and evidence that the gift funds have been received by the buyer.
After closing, many buyers actually repay the gift money they received. Clients who are approved for 97% financing and will actually receive 92% financing must demonstrate that 3% of their down payment is coming from their own funds. Lenders document this by obtaining a copy of the buyers’ most recent asset statement. The remaining 5% of their down payment can come from their own funds, from a gift, or from a loan against a 401k.

Buyers who are approved for 95% financing and will actually receive 90% financing must demonstrate that 5% of their down payment is coming from their own funds. Lenders document this by obtaining a copy of the buyers’ most recent asset statement. The remaining 5% of their down payment can come from their own funds, from a gift, or from a loan against a 401k.

Maximum allowable seller contributions are as follows: If the buyers are receiving 95% financing, the seller can contribute up to 3% of the purchase price toward the buyers’ closing costs and prepaid items.If the buyers are receiving 90% financing or less, the seller can contribute up to 6% of the purchase price toward the buyers’ closing costs and prepaid items.

The Federal Reserve System voted to reduce the federal funds rate by 1/2% today, with the rate dropping from 5.25% to 4.75%. You can view the press release here. What does it all mean? The federal funds rate, in case you are unfamiliar, as defined by Wikipedia, is the rate at which banks charge other banks to lend money overnight to keep their reserves at the appropriate level. You can learn much more at the Fed’s website.

What is their hope in lowering this rate? Basically, banks will save money and pass the savings on to you in the form of lower interest rates on loans and mortgages. Will this actually happen? That depends on a variety of factors, which I will discuss in the coming days and weeks.

The Mortgage Banker’s Association (here’s a link to the Mass. chapter) announced today that the percentage of homeowners receiving foreclosure notices has reached a record high of 0.65%, up from 0.58% in the first quarter. You can find one of the many articles about the MBA’s release here. What’s more astounding than these disturbing numbers is the fact that the delinquency rate, those who are behind on mortgage payments but have not yet started the foreclosure process, is at its highest rate in 5 years - 5.12% of all loans are currently delinquent. This is a huge amount of money that has not been paid, and it is just one of the numerous causes of new lending restrictions.

The chief economist for the MBA, Doug Duncan, states that the huge job losses in midwest states like Ohio, Indiana, and Michigan from auto industry and other manufacturing job cutbacks. In fact, according to Duncan, the problem shows itself the most in Ohio, where the number of mortgages that are in foreclosure or are more than 90 days late is more than twice the national average.

What else accounts for this growing problem? Warm weather states. Florida and California have seen flocks of prospectors buy up property and develop areas during the housing boom. Now that the boom has gone bust, those same prospecting investors are out of cash and are unable to keep up on mortgage payments. Nevada and Arizona also have seen these same problems in recent months.

Most experts predict that foreclosures and defaults will continue to increase in the short term. More explanation on further reasons for this later.

Think the prospect of another act of terrorism in the U.S. is scary? Perhaps we should be more concerned about the subprime mortgage crisis, at least in the short term, as possibly having the largest effect on economic stability here at home.

At least that’s what the folks from the National Association for Business Economics seem to think, based on the published results of their latest survey, published on August 28th.

I encourage you to look over this article as it provides a good sense of the current mindset of a sampling of NABE members, who are the most influential and prestigious economic leaders in business.

A positive sidenote to this gloomy prediction about the country’s economic stability is that the outlook for housing over the medium term (5 years) remains rather positive, with a majority of members thinking that prices will continue to remain steady with a slight increase in home prices. In fact, 39% of NABE members surveyed expected average home prices to increase 2%-6% over the next five years, a good sign that the current rut the housing market is in should shift back to its usual modest gains year over year.