Wednesday, May 18, 2011

Reports on the Demise of Home Ownership May be Somewhat Exaggerated

Distressed homeowners aren’t the only ones suffering during the sluggish economic recovery. Add average homebuyers to the list. The glut of available foreclosed properties and undervalued homes yields fantastic opportunities for first-time buyers or for existing homeowners shopping for larger accommodations. The sobering truth is that today’s market favors cash-in-hand investors, not rank-and-file consumers. While homes are cheap, virtually all consumers need to borrow before they own and our post-recession lending environment has not been very accommodating to the consumer who needs a mortgage loan.

Even though tax incentives artificially boosted home sales in 2010, their departure saw home sales plummet. As government incentives ended, the slow rise of interest rates began. In addition to rising interest rates, lenders implemented tougher underwriting standards making it more difficult to qualify for a loan, and in some cases more expensive; closing costs and private mortgage insurance—often required by lenders when borrower down payments fall below 20% or for other “risky” scenarios --- increased. And pending regulatory recommendations seek to discourage lenders from originating loans at less than an 80% loan-to-value ratio. So despite the affordability of homes on the market, buyers have encountered obstacle after obstacle blocking their path to home ownership. It’s no wonder, then, that the goal of home ownership has lost significant appeal. In recent surveys, only 64% of Americans regard a home as a worthwhile investment. More and more would-be home buyers have taken a pass on the American Dream, choosing renting over owning.

Unfortunately, renters have few guarantees. One major consequence created by the mortgage meltdown is a scarcity of available rentals resulting from the absence of financing for new apartment construction. While apartment building owners profit from high demand and steady returns on their investment, apartment dwellers find themselves at the mercy of short supply, higher move-in costs and rising rents. While predictions on when the housing market will recover vary, the recovery is expected. Consumers locked in the cycle of monthly rent checks could miss an opportunity which is unfortunate as a monthly rent check doesn’t have the potential of building equity the way a monthly mortgage payment does.

The prospect of finding a mortgage in today’s environment, while difficult, is still feasible. A number of alternatives to the traditional 30-year fixed mortgage exist that don’t make the headlines including, but not limited to:

• Adjustable-rate mortgages (ARMs) typically charging interest rates lower than traditional 30-year fixed mortgages with no deferred interest
• “Hybrid” loan programs with an initial lower fixed rate for 3, 5 ,7 or 10 years, then adjusting on a regular basis over the remaining term of the loan
• FHA-insured loans, with more flexible qualifying criteria

Of the above options, FHA-insured loans provide buyers with both the fiscal security of a consistent payment schedule and easier ways to qualify for a loan. Unlike “portfolio” loans where the lender assumes complete risk for the loan, government-backed insurance on these types of loans indemnifies lenders against defaults. Lenders and borrowers may share the cost of insurance premiums.

As a result, lenders can offer FHA-insured loans to buyers with as little as a 3.5% down payment compared to the traditional 20% down, and may be willing to approve a loan for borrowers with lower credit scores. What’s more, with FHA-insured loans, lenders are more willing to investigate a borrowers’ ability to afford a mortgage instead of relying on standardized debt-to-income ratios to make a final decision. Originally intended to assist low and middle-income households to afford a home, FHA-insured loan amounts apply to the lion’s share of the market today thus increasing the program’s appeal to an enormous cross-section of buyers.

Home buyers --- take heart. If your dream is to own your own home, it’s possible. While finding the right loan may not be easy, you have more options than ever to help you achieve your dream.

Peak Finance Company offers residential mortgage financing for the “A” through sub-prime borrower. We serve realtors, CPAs, business and financial planners as well as homeowners and new home buyers with the goal of making the process of obtaining a mortgage as easy, convenient and affordable as possible.

Toll-free: 1-877-874-7325


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