MORTGAGE PRE-APPROVED? SURPRISE - No Mortgage For You!
TOUGHENED CREDIT STANDARDS, DOWN PAYMENT REQUIREMENTS SOMETIMES KILL DEALS AT THE 11TH HOUR!
You've applied for your mortgage loan. You have good credit, 10% down payment. Stable job, never a late payment. Getting that home mortgage should be a slam dunk - right?
Not so fast!
Virtually every zip code in and around Chicago is on the "Declining Market" list for at least one large Private Mortgage Insurance Company - AIG United Guaranty. Than means it is quite possible that homebuyers putting down less than 20% on their new homes may be asked to pay an additional 5% "Declining Market Premium," and are often notified about this sad fact within 48 hours of the scheduled closing.
Mortgage Insurance actually covers LENDERS - not homebuyers - should you, as a borrower, eventually fall into trouble and default on the loan. Their statistics indicate those with lower down payments - less than 20% down - are more likely to default than those with larger downstrokes.
In the old days - say, two years ago - lenders commonnly allowed "piggyback loans." Here, the borrower would take out two separate loans at closing - one for 80% of the purchase price of the home, plus a second, smaller mortgage, usually at a higher interest rate, for 10 or 15% of the remaining purchase price. The balance - usually five or 10 percent - would comprise the buyer's downpayment.
In this scenario, Mortgage Insurance is not needed!
Trouble is - many of these small, second loans fell into default, while the larger, primary loans, many of which were adjustable rate products, reset at a far higher rate and down payment. Both loans defaulted by the thousands across the country - and the practice of "piggybacking" loans today has been virtually eliminated.
So, today, the need for mortatge insurance is back - and rules for its issuance have become very, very conservative, as PMI Companies want to minimize their financial exposure in the event of borrower default.
Tighter PMI standards, higher required down payments, and an escalating list of markets the companies feel are "in decline" are the result.
What happens in the real world - and has happened for four Dean's Team Chicago transactions this year - the PMI company increases the overall down payment requirement AFTER other aspects of the loan have been approved. When they act, the amount of required down payment, through a "Declining Market Premium", is usually 5% - additional money versus the origiinal down payment approved by the lender in the first place!
Buying a $400,000 house, wtih 10% down, requires a $40,000 cash down payment plus closing costs. If you receive notice, two days before closing, that the new required down payment is now 15% - you, as a borrower, now have to come up with an additional $20,000 - or $60,000 total!
What if you don't have another $20,000 laying around, or easily accessible within a few days? The purchase cannot close!
Due to close on the sale of his $170,000 condo at the end of June, a Nevada pediatrician was all set to sell to another young buyer. The buyer was very well qualified financially, the property appraised out, and he property inspection was satisfactory.
Then, bad news from the lender - due to tightening mortgage rules, they buyer no longer qualified for the 95% loan he originally was approved for, and would now have to increase his down payment to 20%.
Not having the additional $23,500 required to qualify according to the new standards, the deal died, and the buyer walked away without the condo.
Both buyers and sellers are being impacted here! The latest changes to lender's requirements are not percolating down to the loan originator until just before the scheduled closing - leaving ready-to-close deals washed up on the beach!
"The underwriting has really tightened up," says David Olson of Wholesale Access Mortgage Research and Consulting. "Before, if you could fog a mirror, you got a loan. Now, that's not the case."
In Olson's estimation, at the peak of the housing boom, roughly 20% of the mortgage market was subprime, and nearly 20% was "Alt-A loans" — or "A-minus" loans, typically for those with good credit but with high debt-to-loan ratios or little or no proof of income. Both categories comprising about 45% of the residential mortgage market - have nearly completely disapeared.
Today, in what should be a very advantageous market for prospective home buyers - with high levels of available home inventory and high numbers of foreclosures driving down prices - buyers are increasingly left wondering if their recently-pre-approved mortgage loan will actually go through.
Is anyone better insulated from these potential mortgage pitfalls? Yes, there are some.
Here in Chicago, those buying in the most tony neighborhoods - The Chicago Loop, LIncoln Park, River North, and The Gold Coast, among others - often have no other hard-to-sell properties in their portifollio. Many are younger professionals with sizable down payments, and top credit. Most bring two big incomes to the closing table.
And most of these professional buyers, and the high-end properties they typically seek, close.
But for those with less income, less stellar credit, a smaller down payment, or a house they need to sell first -the road is much more treacherous.
See Anna Bahney's article in yesterday's USA Today for more info, as well as a link to the AIG United Guaranty Declining Market List across the U.S.
DEAN MOSS & DEAN'S TEAM CHICAGO
