From Homescape

I have two friends who are looking to buy a home this year. With a combined income of $100,000, and solid credit scores — somewhere above 660 I’m assuming — knowing what I know about the market, it would appear that they would have a good chance of getting approved for a home loan. To fit their lifestyle and budget, they’re in the market for a two-bedroom condo for around $265,000 in Chicago. I instantly thought, no problem, they shouldn’t have a hard time getting approved for a loan, even with stricter regulations from lenders. But when they told me they had less than 5 percent saved up for a down payment, their sunny outlook didn’t look so bright anymore.

Tougher lending standards
Before the subprime mortgage fall out, many nonprofit groups and government sponsored agencies pushed for home buying programs targeted to borrowers with a solid job and good credit, but didn’t have a lot of money saved up for a down payment to invest in a home. Various Federal Housing Administration and nonprofit programs were created for this subgroup of people. But with the subprime fallout, borrowers are seeing some of those programs tighten their standards even more.

According to a mortgage broker I spoke with over the weekend, while the zero-down-payment loans are no longer being offered by most lenders and banks, low-payment mortgage programs where you can put down as little as 3 to 5 percent of the purchase price are still being touted as an option. To qualify you generally have to have excellent credit — 680 and above — and purchase private mortgage insurance (PMI). The PMI alone can tack on an additional $100 or more on your monthly mortgage payments. Borrowers can also expect to pay higher interest — between eight to 10 percent — and more up-front fees with these types of low-money-down loans.

While it’s still possible to get a loan with less than 10 percent down, it doesn’t mean you should. Putting down 20 percent will assure the home buyer a cushion. If home values drop 10 to 15 percent or if you face job loss, you’ll still have some equity left in your home and you won’t get stuck paying more on your mortgage than your home is worth — a problem many home owners are facing today.

Mortgage expert’s advice              

"Yoda" is an Atlanta-based mortgage expert with over 30 years of experience with home loans.

My mortgage guru, who I like to call Yoda, had this advice to give to my friends looking to buy with less than 10 percent down:

“While it is somewhat more difficult to get them approved with a smaller down payment, higher credit scores and higher cash reserves will most likely be required and mortgage insurance companies are requiring lower debt-to-income ratios. But with today’s mortgage climate, changes occur daily so I cannot say with any confidence that these loans will remain available in the near future.

“Being on the lending side, I would say that the point of the 20 percent down payment is to protect the lender and various investors. The down payment, among other things, is the incentive for the borrower to keep making the monthly payments. Without the borrower’s investment, the likelihood of delinquency goes up tremendously. From the borrower’s perspective, if they have little or no equity when they purchase the property, they may have less or even negative equity, but they still have the same home they chose to buy and there was surely some motivating factor besides the financial one. If borrowers remain patient, the odds are still good that values will return and their purchase will have been a good decision.

“As to whether or not I would recommend the couple to buy now, is a little more complicated. First, they should be committed to staying in this property for some time. Also, the individual market makes a difference. Some markets are relatively stable and some are still declining. There are some great bargains available if one is a savvy shopper and not solely motivated by what you think you have to have instead of what you need. Finally, if you find the house that meets your requirements and you are committed to living there for five or more years, it might just be an excellent time to buy.

“Sales prices are lower and fixed-rate loans are available below six percent. It is a buyer’s market. But I always try to remind people that real estate has always been considered a long term investment and increases in value should not be treated as income to be spent on yet a bigger-screen TV.”

Got hot local housing tips or a story you want to share? Contact Amy Le at openingdoorsblog@homescape.com.