Archive for April, 2007

Buying a home in the aftermath of the sub-prime lending shakeup…. What you need to know

Thursday, April 12th, 2007

By now, I’m sure that almost everyone has heard of the sub-prime lending shakeup.  In case you haven’t heard, the sub-prime lending shakeup was the result of many lenders’ policy of making loans that were extremely aggressive and not necessarily good investments and that caused those loans to have a very high default rate, which has caused investors to stop purchasing the loans in the secondary market.  Now, you may ask, what does this have to do with my purchasing a home.  In many cases, sub-prime lending has not only to do with your FICO scores, but the structure of your loan and finances.  So, while you may have good credit scores, your financial situation might not look as appealing to a lender if you’re using one hundred percent financing. 
                           
In most cases, what this means is that if you’re planning on using 100% financing, you need to make sure that your income is sufficient in qualifying you to make your payments and that your FICO scores are truly exceptional.  If you are unable to meet these requirements, you’ll need to plan on putting at least 5% of the purchase price as a down payment.  Otherwise, your interest rates and low terms will not be favorable.
 

Another effect of this shakeup has been that lenders are now constantly tightening their lending guidelines, and in many cases these changes are occurring daily.  So while one day you may have a loan approval, on the next day it’s withdrawn because the guidelines have changed.  Thus, when you are writing your contract to purchase a home, you need to be very conscious of how long your contingency periods are for your loan and appraisal.  If you are involved in a transaction where your contingency period for your loan does not remain in effect until the loan funds, you should definitely have some concerns that you may lose your deposit.  Another important factor in protecting yourself is making sure that you have a loan officer whom you fully trust to be completely frank about your abilities and limitations for financing.
 

Notwithstanding all these cautionary notes, while the sub-prime lending shakeup will have an effect on the real estate market place, I do not believe that it will be as dire as the media is predicting.  There will be no tsunami of foreclosures, no collapsing markets, and no bubbles bursting.  Of course, there will be adjustments in the real estate market, but this is purely a natural phenomenon in the economy.  Many reputable sources are predicting that the real estate market will not crash and that over the next year or two, homes will continue to slowly increase in value.
 

In conclusion, while the sub-prime lending shakeup will affect your purchase of a home and the overall market, as long as you are aware of it and take the next necessary steps to protect yourself, the effects should not be dramatic.
 

Written by James Dedolph, creator of HomeSniffer.com where you can find Homes for Sale in San Diego and LoanSniffer.net where you can find the best rate and terms for Homes Loans in San Diego .  Both of these sites are a good resource for information about San Diego Real Estate .