The real estate bust in the USA has caused many potential home owners and lending banks to rethink their strategies. To avoid the flux of buyers who purchase homes they really cannot afford, banks are making it more difficult to get the mortgages. Down payments have ballooned over the last couple of years.
The government has also called for a gradual ten percent increase minimum on down payments on conventional loans for Fannie Mae and Freddie Mac mortgages in the public sector. The private real estate sector is meeting that requirement and going beyond the minimum amount as a safety net against potential buyers who really cannot afford the homes they are purchasing. This in turn, will cushion their investment in the real estate as house pricing continue to plummet.
The Wall Street Journal by real-estate portal Zillow.com, reports that the average conventional mortgage down payment in nine major states rose to twenty-two percent. The conventional mortgage rates have doubled in three years and they are at their highest since the initial tracking of mortgage down payment rates in 1997.
A study conducted by the Federal Reserve Bank of St. Louis (2009,) concluded that home buyers who are offered lower payments will bail out quicker during an economic recession, housing market slowdown, or personal circumstances such as job loss and so on. The lending banks are taking note and increasing their down payments in order to weed out these potential buyers and to cushion a buyer’s financial standing during times of loss. In other words, the more money a home buyer has to pay for the new home, the less of a chance that home buyer will be deeply affected by economic misfortunes and decreasing prices.
It is noted that increasing down payments may further drive the prices down as fewer consumers will be purchasing homes. Rising costs are adding to the mix. For example, 30-year-fixed mortgage rates rose to 5.5 percent, the highest since April of 2010. Chief executive of Real Estate Mortgage Network Inc, Peter Norton, predicts that if the down payment goes to 20 percent it could cause a house market crash.
In the meantime, potential buyers who will not afford these costs in the conventional market will turn to the unconventional market, and alternative programs offered by the Federal Housing Administration or Veteran Loans, which are considered riskier investments. Zelman & Associates report that half the mortgage loans in 2010, were issued by the Federal Housing Administration at 3.5 percent. Nevertheless, home purchasers pay higher interest rates and must carry home insurance often resulting in larger monthly payments.
The increasing down payment rates are forcing middle class families to think twice about purchasing a home. Many people will turn to alternative purchasing plans, or simply continue to rent.
Norton, suggests that keeping the down payments down to about ten percent, for good buyers with good credit histories, and raising the down payment on riskier borrowers would make more sense.
Either way, the banks must come up with a plan that will make as many home purchasers happy; a balance must be found somewhere.
If you are in the market for a new home contact the experts at Canseco Group for more information on requirements. http://canseco.com/
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