Teaser Rates

Every week we hear about historically low rates on home loans. Rates on 30-year fixed mortgages are well below 5% and still falling! At any other time, interest rates like these would have jump started the real estate market from a standstill to a frenzy in no time. But now very few people are taking advantage of these low home mortgage rates. What’s wrong?

The fact that so many homeowners are upside down on their mortgage is the root of the biggest problem. Over the last few years property values have fallen significantly in every state. Homeowners who bought their houses when values were higher now owe more than their homes are worth. Even those who bought their homes several years ago are now under water because they took out cash when they refinanced their homes or got second mortgages.

Banks will only make loans of some percentage – 80% up to 97.5% – of a home’s current value. It’s not possible for people to pay off their old loan with proceeds from a new loan with a lower balance. 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. There are also a lot of people who are working jobs that are far below their qualifications – and pay less – or working part time jobs. Somehow many of these people are making ends meet in spite of the challenges. 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. Changes in employment make it difficult to qualify for a loan even if the income is sufficient. Two years of steady employment in the same field is considered standard by most lenders. Borrowers who switched to a different field because they couldn’t find work in their chosen field, or borrowers who took a contract position won’t qualify until they have a two year history to show.

Lending standards have risen. The huge number of defaults can be traced back to lending practices that were too lenient. As a result, lending requirements have become much tougher. They want to see higher credit scores and lower debt ratios than they did years ago. The chances that a homeowner has a lot of cash in the bank and nearly perfect credit, after surviving employment problems, falling home values and other challenges, is slim.

First time home buyer face the same employment and strict lending practices problems that existing homeowners do, but at least they’re not under water on 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. This isn’t a comfortable time for a beginner to take the plunge.

So those tantalizing interest rates that we keep hearing about in the news remain just out of reach. Something that’s technically true, but simultaneously too good to be true.

If you are one of those in a position to buy a new home in California, this is the time to do it. Once the market turns around, interest rates will rise quickly. New homes Chula Vista