Tuesday, October 21, 2008

Bigger Down Payments Create Challenges for Larger Homes

Some fast facts that make smaller homes easier to purchase in today's precarious lending market:

The current conforming loan limit is set at $729,000, but expected to reset as of January 1st, 2009 down to $625,000. Traditional financing is available for conforming loans with only 10% down. Down payments as low as 5% will still be possible under $625,000 with the help of FHA. The last day to qualify for the $729,000 loan is December 1st, 2008. If you act now, a qualified FHA buyer with 5% down ($38,250) can buy a $765,000 home and receive a reasonable conforming loan rate. After December 1st, qualified buyers with a 5% down ($32,500) can only buy a $650,000 and still receive a reasonable conforming loan rate.

Jumbo loans up to $1,000,o0o currently require a minimum of 25% down payment. Loan amounts from $1-1.5 million will require a minimum of 30% down. This means a jump today from a conforming $729,00o home to a $730,000 loan will require 20% more in down payment.

Today's buyer with $38,250, looks to buy the $765,000 house under the conforming loan guidelines. Say the buyer can not find a home that suits him in the price range. December first comes and goes. Time for a visit to the lender in the hopes of increasing the price range to $835,000 to meet his needs. Under the new Jumbo requirements the buyer will need 25% down ($208,750) to qualify. This buyer's wish to increase his search parameters by $70,000 is going to require digging deep. He will have to come up with an additional $170,500 down payment in the new year to accomplish his new search. Add volatility of the interest rates and the monthly payment may also increase dramatically even if the loan amount has not increased due to the larger down payment. Enter Mom and Pop: See the NYT article, Mixing Money and Family.

Jumbo rates are more expensive when buyers do qualify for them. Creative financing used to bridge the gap with second mortgages. Today, second mortgages are available up to $350,000, but only at a total loan to value ratio of 70%. This means a minimum of 30% down. These are equity line second mortgages with current rates from 4.75-5.5%.

Many clients looking to purchase larger homes do have assets. Often they already own a home with existing equity. This equity had been tapped in the past during a home purchase, based on an assumed rental value of the property. Now, in order to qualify without carrying the debt of both residences; Borrowers must retain 30% equity in the current house. They must have a signed rental agreement as proof of the rental value. They must have rental deposit verification. And they must show six months of PITI in reserves required on the current residence. Given these new restrictions, we may see more sale of house contingencies in our future. More likely, home buyers may be forced into an already bloated rental market as they seek to liquidate the equity from one property (selling first) as they strive to purchase their next home in a still competitive market. Beyond the financial stresses this often adds the stress of a second move.

Thanks to Ted and Tom from MPR Financial for helping sort out the details.

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