We hear about historically low interest rates on home loans practically every week. Rates on 30-year fixed mortgages are well below 5% and still falling! 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. Why is that?
The fact that so many homeowners are upside down on their mortgage is the root of the biggest problem. Property values have fallen significantly in the last few years. 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. Whether you want to sell your house and buy another, or just refinance the one you have, this is a deal breaker. 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. Many more are underemployed – working part time jobs or jobs far below their qualifications and income. In spite of this, a lot of them are making ends meet somehow. They’ve cut back on spending, stay-at-home moms have gone back to work, and they’ve started their own businesses. 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. Two years of steady employment in the same field is considered standard by most lenders. 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.
The standards for qualifying for a loan have become more stringent. The fact that lending practices were too lenient, causing the large number of defaults that we’ve seen is to blame. 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. There are not many first time buyers out there with great credit, a hefty down payment and sufficient verifiable income. Fear of losing their jobs or of home prices falling further has detered many of those who actually are in a good position to buy a home. 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 new home in San Diego, this is the time to do it. Once the market turns around, interest rates will rise quickly. New homes Chula Vista
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