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Why Buying a Home is Tougher Now

Aug 25, 2008
The mortgage crisis has caused credit tightening, which in turn can make buying a home more difficult. This article explains some of the effects of the credit crunch including the disappearance and temporary appearance of some loans.

The severe losses suffered by Government Sponsored Enterprises (GSE's), Wall Street firms, and other investors across the U.S. resulted in credit tightening and the disappearance of the loan products that caused these losses. The foremost of these loan types was the high-risk, 100% CLTV 2nd mortgages on investment properties, most of which were transacted with Stated Income and Stated Income Stated Asset (SISA) documentation. This type of loan started disappearing two to two and a half years ago with credit tightening or discontinuance occurring rapidly. Additional high-risk loan programs that caused much damage were the Owner Occupied SISA and No Doc loans. Such mortgages are no longer available from most mortgage lenders.

The struggle to mitigate high losses led to maximum loan-to-value (LTV) percentages being reduced for conforming full-documentation loans for homes in declining markets (areas where home values have gone down). The reduction was done with the hope that default rates would decrease, and is being lifted this summer under certain circumstances.

Conventional/conforming loans (non-governmental loans equal to or less than $417,000) and FHA-insured loans have been popular during the first six months of this year (2008). Borrowers with poor credit have the prospect of qualifying with both types of loans, although the FHA-insured mortgages may limited to a minimum credit score of 580. FHA mortgages permit a slightly higher loan-to-value ratio (lower down payment) than conventional mortgages.

The following are three new and temporary loan programs:

FHASecure - a FHA refinance mortgage available to homeowners currently tied to a non-FHA adjustable rate mortgage (ARM). Although originally meant for borrowers who had defaulted, or would likely default on their ARM, due to the rate changing, it was later opened to a wider demographic.

FHA High Balance - the U.S. Department of Housing and Urban Development (HUD) has established maximum loan amounts for its FHA-insured mortgages. These amounts vary by county. HUD has temporarily increased the maximum size of the loans it insures. These higher-balance mortgages may actually have better rates than FHA mortgages with lower loan amounts.

Agency or Conforming Jumbos - Jumbo loans are mortgages for amounts above $417,000. Loans values equal to or smaller than $417,000 are "Conforming" loans. Conforming loans and Jumbo loans normally have different guidelines that must be met in order to qualify for the mortgage. However, through the end of 2008, borrowers wanting loans up to $729,750 can qualify under the regular Fannie Mae and Freddie Mac conforming loan guidelines with the addition of some underwriting restrictions. The county limits established by HUD determine the actual maximum loan. These loans are available only for 1-unit purchases (i.e., the maximum does not apply to duplexes).

You can view HUD's county limits at: https://entp.hud.gov/idapp/html/hicostlook.cfm
About the Author
If you're buying a home and want a Jumbo Loan or High Balance FHA mortgage , visit Direct Mortgage.
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