Home Loan Rates Are Unreal!
We hear about historically low interest rates on home loans practically every week. 30-year fixed loans are available with interest rates well below 5%, and they’re still going lower! 15 and 20-year loans offer even lower rates. Interest rates like these would have home buyers lining up to buy any available real estate in any other market. So who is getting these super low interest home loans? Very, very few people.What’s wrong?
The biggest problem is that a lot of homeowners are upside down on their mortgages. Over the last few years property values have fallen significantly in every state. Many homeowners are finding that their homes are worth less now than when they bought them. Even many of those whose homes are now worth more than their original purchase price may still be under water if they refinanced their home and took cash out.
Banks will only make loans of some percentage – 80% up to 97.5% – of a home’s current value. The thousands of people who owe more than their homes are worth can’t pay off their old loan with the proceeds from a new loan. That’s true for a refinance or for selling one house and buying another. So even if they are well qualified borrowers, unless they can come up with the cash for the shortfall, they’re stuck.
In this economy the unemployment rate is high, but as concerning is the length of time it has been so high. Many homeowners have been out of work for an extended period of time. There are also a lot of people who are working jobs that are far below their qualifications – and pay less – or working part time jobs. In spite of this, a lot of them are making ends meet somehow. They’ve found creative solutions, including starting their own businesses, cutting back on spending and sending stay-at-home parents back into the work force. But they can’t show sufficient income to prove to a lender that they can make a lower mortgage payment than the one they’re making now. Even for those who have sufficient income, changes in employment can make it difficult to qualify. Most lenders want to see two years of employment in the same field to consider a buyer stable. Contract work is not considered stable until it has a two year history, even if the work is in the same field that the person was originally employed in.
Lending standards have risen. The huge number of defaults can be traced back to lending practices that were too lenient. So banks have tightened up their requirements. Requirements for debt ratios and credit scores are much stricter than they were even years ago. If a homeowner has been keeping it together through falling home values, employment problems and other challenges, the chances that they have near-perfect credit and lots of money in the bank is slim.
First time buyers face all of these problems, except for being upside down on their mortgages. Unfortunately potential first time buyers with sufficient verifiable income, a hefty downpayment and great credit are in short supply. Many of those that can buy a home now are worried that home prices will decline further and/or that they’ll lose their jobs. Buying your first home is a scary experience. The current economic conditions don’t make it easy to take that risk.
So while we all drool at the latest reports of historically low interest rates, they remain just out of reach for most. An enticing treat that we can see and smell but not taste.
If you are one of those in a position to buy a buy a new home in California, this is the time to do it. Once the market turns around, interest rates will rise quickly.
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