Financing Tactics in the New Mortgage Market
How can prospective homeowners navigate the changing climate of buying and selling a house? It helps to understand the events of the recent past and the lingering effects influencing real estate values.
While multiple factors led to the economic downturn in 2008, the housing market continues to play an important role in our economyís health. A few years back, some large lenders began to bundle mortgage debt into asset-backed securities, which were then sold as investment vehicles to Wall Street brokers. These were advantageous to both the mortgage lender that made a profit from selling the bundled loans, and the investment firm that received a portion of the fees.
As long as homeowners/borrowers were able to make payments on their mortgages, the securities made money. However, when consumer debt began to rise and borrowers failed to make payments, or defaulted on their home loans, these securities lost value. When a large number of mortgage-backed securities began to lose money, many investors sold to cut their losses, and the investment market as a whole suffered.
With increasing numbers of foreclosures and many adjustable-rate mortgages scheduled to adjust to higher payments, the mortgage-backed security is now seen as a high-risk investment. Large lenders no longer have a market for these securities, and they donít have the assets to keep and service the loans themselves.
As a result, smaller banks and lenders donít have the large credit lines to fund mortgages and other loans, and lenders are reverting back to more conservative standards for extending credit. Without low teaser rates, no-money down offers, and loose credit checks, potential homebuyers are now required to prove that they can truly afford their loan amount.
For those looking to buy a home, here are some tips to help facilitate the financing aspect of the sale:
1. Conduct an informal analysis of your finances before approaching your lender. You may avoid surprises by taking the time to assess your current financial situation. Be sure to collect full documentation about your income, debt, and credit report for scrutiny by your lender.
2. Get pre-qualified. Pre-qualification from an experienced lender is essential in the current real estate market to demonstrate your seriousness. Consider seeking FHA-approved institutions.
3. Do your homework if youíre seeking a high-cost loan. Jumbo loans require extensive documentation and generally carry a higher rate than conventional loans. Knowing the FHA loan limit in your locale can help you pre-screen potential properties. The FHA provides this information at https://entp.hud.gov/idapp/html/hicostlook.cfm.
4. Be prepared to move quickly after making an offer. Gather documentation and complete the loan application as soon as possible after an offer is accepted to lock in the loan and rate. Loan pre-qualification letters may be dated for a short time period, so act quickly.
5. Factor in potential time delays. The traditional timeline for underwriting and the response time from lenders has increased with tighter lending standards. It may take up to three weeks to finalize a loan application.
6. Donít forget about private mortgage insurance (PMI). Many lenders require borrowers to obtain PMI if the down payment on a house is less than 20% of the overall cost of the loan. Be sure to factor in the cost of PMI into your budget.
Although the real estate market may be uncertain, understanding the state of financing can help you better manage the purchase of your next home.
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