Down Payments in Today’s Real-Estate Market

 The news media has been talking lately about how difficult it is to get home loans approved these days. I think there may be some misconceptions about available loans, down payments, etc. In the ‘old days’ – last year! – lenders were offering 0 % home loans. Some would even allow you to receive 3% of the sale price as a concession. In other words, you could come to the table with very little of your own money. Several lenders offered that product on investment properties as well. It is great for a market that continues to have appreciation and home values continue to go up but we found that when home values drop and people become upside down in their mortgages it is much, much easier to just walk away from those properties.

Years ago when the only down payment option was 40 or 50% down, the Federal Housing Association came into existence. They offered a product that enabled folks to buy their own homes – a 3% down loan  insured by the government with insurance added to it. Some people call it PMI (Private Mortgage Insurance); some call it MIP (Mortgage Insurance Premium). The reason it was there was insurance in case you foreclosed on the property. Should that occur, the lender then had an amount of money to help offset foreclosure expenses. The FHA is a good loan but I think we will find that the qualifications for an FHA loan will become even more strict. An FHA style loan by design is not a risk base on your credit score like a conventional loan. In other words, you can have a lower credit score and a fair amount of bumps and bruises and still be approved for an FHA loan. Well, that was true until the credit crunch. Then many guidelines came out and now some lenders have placed a minimum credit score on an FHA-style loan. About 8 months ago they began with a 580 credit score – if you had a 580 or above credit score and met all the other criteria, you could be approved for an FHA loan. Then lenders began to change the numbers – 580 became 620 then a 640 – so it is clear that several lenders are recognizing that those with lower credit scores have a higher risk of defaulting on their loans. The lenders are trying to control or lessen their losses by structuring things credit score driven which goes against the principle of how the FHA loan program came about. There has been talk that the FHA will make a change to a 5% down payment in the future instead of 3%.

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