Liquidity is a term being thrown around a lot right now as banks clamor to secure deposits so they can in turn lend money. The long and short of it is that there is still a lot of money out there, but a lot of people have pulled money out and are sitting on the sidelines waiting for this mess to settle down. These giant peaks and valleys we have seen in the market are a perfect example of that "sideline" money jumping into the market and then dumping. Don't expect that trend to end any time soon.
This liquidity challenge has changed things in the lending industry. It's a little harder to secure a loan these days, but there are still plenty of loans being made. Don't panic! Lenders were destined to become more cautious with their loans, because they were so greedy reckless during the boom of 2003 through the beginning of 2007. Their carelessness has created the newspaper headlines we see today describing delinquencies and foreclosures, made worse by falling home values. Here's some things you should expect in the wake of the recent financial greed party situation.
You will need more documentation to secure a loan. This simply means that lenders are doing more than the quick check of credit to preapprove buyers. Expect lenders to request W-2s, tax returns and bank statements more times than not.
Private Mortgage Insurance standards have tightened. When a buyer doesn't put down at least 20% down on the purchase of a home, most lenders require private mortgage insurance (PMI), which is to insure the lender upon your default. By the way, the buyer foots the bill for the monthly premium payments. Some mortgage insurers are refusing to insure properties that fall into a declining market category as determined by their independent research. This leaves buyers scrambling to hold deals together. The fine folks at the FHA have stepped in to help in these cases with the only downside being you'll have to use a lender that has FHA certification.
Fannie and Freddie are passing along fees. Before the government took over Fannie Mae and Freddie Mac, the two entities started adding fees onto mortgages for consumers or passing along through increased an interest rate. These are often times referred to as "loan level adjustments." These fees are being reevaluated currently as they are seen as an obstacle in supporting affordable housing.
Jumbo loans are tough. Jumbo loans are issued for mortgages of $417,000 or more, and these jumbo loan rates are higher than rates on conforming loans considering theres' more at stake for the lender. Many lenders are requiring as much as 12 months' worth of house payments in readily available savings in order to secure their jumbo loans. With higher jumbo rates, many borrowers are turning to 5/1 adjustable rate mortgages to help bridge the gap.
On a positive note, rates have been falling here recently on an apparent reaction to the Fed's rate cut on the 8th of October. Despite challenges on the documentation and qualification side, money is inexpensive to borrow, and my contacts in the industry suggest that the mortgage rates will continue to fall. Today's 30-year fixed rate was at 5.625, and I almost fell out thinking about it going lower. If you have good credit, there's absolutely nothing to worry about. The developments mentioned above shouldn't affect those with good credit much, if at all. The first time home buyer really will not know much of a difference, but just be prepared if this is not your first home purchase. A little bit has changed recently. Nonetheless, it's still an amazing opportunity to buy, and you will be rewarded for your inconveniences with an excellent interest rate.
Lesley and I work with some wonderful lenders that, like us, simplify things for you. You can click on "Vendors" under the "Resources" tab on www.thepeterscompany.com to see some of our recommendations.
