Boy, how things have changed in just one year. American consumers went from 100% financed loans, stated incomes on mortgage applications and minimum 650 credit scores or lower to no 100% loans(except FHA or Rural Development Loans), no stated incomes on applications and 700+ minimum credit scores. This time last year was the beginning of the end. The summer of 2007 was when the foreclosure and financial mess really got rolling. Fast forward a year later and tighter lending guidelines are now the norm, giving buyers less options for little to no money down loans. Lending institutions have had to tighten the belts folks. What’s painful is that the belt tightening has happened so quickly. But hey, common sense should tell you that if you don’t have any money in the game(100% financed), then what’s keeping you in a home now that it is not worth what you paid for it. Here in lies why, for one of many reasons, foreclosures are through the roof in this country and why we now have less options for mortgages. Is this bad or good? I say it’s very good in the long run, but very painful in the short term.
The financial industry will rebound. The lending industry just has to take some punishment for some of their lending practices over the last few years. And guess what? A lot of homebuyers out there who didn’t think through their mortgage terms have to take some punishment as well. You will actually have to put some money down now when you buy a home. Wow, what a concept! I also think history will show that this period of time saw the American homeowner devourer close to if not all of the equity they had in their homes in order to feed a very hungry spending appetite. This tapping of home equity prior to selling is truly unprecedented and deadly in those cases where the tapping was not for home improvements.
So you still want a 100% financed loan? Well you better hurry up on that too. As I understand it, the massive housing rescue bill that was just passed by congress a few weeks ago will eliminate one these options as of October 1, 2008: Down Payment Assistance. FHA backed loans (backed by the American tax payers) have been providing mortgages for years that are up to 97% of the value of a property with the borrowers coming up with the other 3%.. However, in 2000 FHA started allowing down payment assistance programs that would gift the 3% difference. The way this works is a seller agrees to enroll in a down payment assistance program run by a third party non-profit organization. The non-profit loans the buyer the 3% difference at a fee that is usually around $200-$400, .and at closing, the so called gift equity is reimbursed out of the seller’s proceeds along with the fee to the non-profit organization.
What has just happened in the above scenario is the buyer has been able to get in a home with no money down, having 0% of their money tied into the purchase of a home. But you say what about closing costs? Sellers have been picking up the dime on that too. This super questionable loan practice is going away because delinquency rates have soared in the years since down payment assistance programs were introduced. According to HUD’s own information, the FHA delinquency rate currently stands at 16.81%, more than 1 out of every 6 FHA single family borrower is delinquent on their loan. More information shows an unfavorable relationship with FHA Loans and Down payment Assistance Programs since their inception. Before 2000, down payments were primarily funded by borrowers. According to HUD, FHA delinquency rates were only 9.07% back in 2000. HUD also says in 2000, 76% of down payments were primarily borrower-funded while only 2% came from non-profits.
Fast forward to 2008 and the numbers are astounding. Only 47% are borrower-funded while non-profit down payment assistance has increased 1750% to 37% of down payment monies. In Washington D.C., we have another huge problem on our hands. If FHA is going to be the savior of the mortgage industry meltdown, these 100% loans have to go, and they are. On top of all of this, you will now have to put down at least 3.5% instead of 3%.
Rural Development Loans are also a source of 100% financed loans. Not sure what the status will be on those going forward, but they are not available in any Athens/Clarke, Oconee, or Jackson Counties. Some of Madison and all of Oglethorpe qualify.
R.I.P. 100% Financed Loans. The days of saving for a house just may be upon us again. Or is that the days of hitting up the parents for a little down payment assistance? Toss it how you want. homeownership in the U.S. was slowly being perceived as a right when it is really a privilege, and when your roof starts leaking and you are cash-strapped, one doesn’t feel so privileged…
Brian Bowen
I found your blog on google and read a few of your other posts. I just added you to my Google News Reader. Keep up the good work. Look forward to reading more from you in the future.