With the economy starting to show signs of turning around and consumers gaining more and more confidence with the market, it’s time to look at mortgages. Have consumers learned from the mistakes made only a few years ago, or have they gone back to spending the way they used to?
Colleen Dolak, a Washington, D.C. area realtor, doesn’t believe that lowered prices mean clients are setting their sights any lower; rather, it means that people have altered their timelines on when things will happen. A client of hers had purchased a condo in the up and coming Waterfront District in Washington with the expectations of someday owning a townhouse. The client’s dreams nearly came true a year ago when he was looking at a small townhouse that was on short sale, but not exactly what he wanted. Finally, he found a much larger townhouse, that was ultimately higher priced, but what he had really wanted. This shows that despite the mortgage crisis, consumers are still setting their home ambitions high. Now it seems that with prices continuing to fall, it’s easier for clients to purchase a larger home at a lower price than it was five years ago when the Washington, D.C. area really began to explode.
While declining prices may be good for consumers, they are not so good for banks, because part of the reason for the decline in prices is that the market is flooded with homes that have been foreclosed on.
Bank of America is one financial institution that is still recording losses. With their recent announcement of missing third quarter targets due to credit card delinquencies and defaulting mortgages, it’s no wonder why the big consumer loans aren’t coming in the way they used to. The Washington, D.C. region has not been hit as dramatically as some other areas in the United States, and yet, according to Hillary Legrain, a Senior Mortgage Loan Officer with Bank of America, market prices have dropped considerably because of the foreclosures. Only several years ago, she would see a jumbo loan application every other day; now she will see one once every two weeks. The average size of the loans these days is $300,000, which isn’t enough to purchase a townhouse within 20 miles of downtown Washington. The average used to be much higher, indicating that consumers are no longer purchasing high-mortgage homes.
Part of the reason for this decline in numbers is because buyers need to come up with more cash to offer a down payment. VA loans, which are only available to veterans and current military, don’t require a down payment. The only other 100 percent financing available is the FHA loan with an assisted down payment from an organization like Neighborhood Stabilization Program or American Down Payment Dream Initiative. Both programs have income limitations or restrictions such as being a first-time homebuyer. FHA loans are very popular products because they only require a 3.5 percent down payment.
Before September 2008, FHA loans were easier to achieve for any buyer without money saved because of a loophole that allowed for a seller-assisted down payment to the buyer through a nonprofit organization like Genesis or AmeriDream. In the summer of 2008, Congress passed legislation that eliminated the seller-assisted down payment. Nowadays 80 percent of Hillary Legrain’s loans are through FHA. She believes that there is a rise in these types of loans because many buyers—those who are able to offer a higher down payment on a loan—want to keep more of their money accessible in the case of hardship.
However, only putting down the minimum amount allowed in order to obtain the loan may not be the best idea for buyers. Colleen Dolak has seen contracts where her client’s offer was selected over others that had a higher offering price. The reason was because they were more financially viable than the other offers. Having more money to put down towards the purchase of a home sends a message to a seller that the buyer may be more fiscally sound than another buyer who offers a higher price with less money down.
Unfortunately, not all buyers take the time to think about what they can truly afford. Home buying is a very emotional purchase—and when a buyer feels that they’ve found a home that is perfect for them, despite being out of their comfortable monthly payment range, they will often try to rationalize how they might make it work. Colleen has seen clients who were unable to purchase the home they wanted due to more stringent lending practices. But as the lending guidelines change and people continue to seek the home they really desire, it’s important that a loan officer consult with their clients to suggest what they can afford. In several cases, the suggested guidelines can provide a higher maximum dollar amount that the clients can actually afford, which is why Hillary works closely with her clients to achieve a purchase price that equates to a comfortable monthly payment. This doesn’t stop her from showing them what they can afford—it’s important to show them all the options to enable their informed decision on the type of loan product to purchase and whether an ARM or fixed loan is better for their particular situation.
A lending officer can be the voice of reason in an emotional situation. Consulting with clients to look at their monthly costs and figure out a payment they can comfortably live with can save another family from foreclosure and the lending company from loss.
