Mortgages Are Becoming Cheaper but Can You Get One?

April 07, 2011 / Russell Legato, Residential Property Analyst

Mortgage prices are falling today but there’s a catch… banks aren’t willing to lend- even to good credit.

Mortgages Are Becoming Cheaper but Can You Get One?

According to the Federal Reserve, almost a quarter of people applying for loans are being turned down including good borrowers with only one or two blemishes on their credit scores.

The denial rate tells only half of the whole picture. A lot of potential buyers don’t even attempt to make a loan because they assume ahead that they can’t get one.

Industry analysts say that the lowering demand for homes and the decrease in prices are attributable to two factors.

First is the raise in required credit scores by banks. The average credit score rose from 720 to 760. For FHA loans, the average score went from 660 to 700. Loans given to borrowers with less than a 620 score are close to nonexistence.

Second is the increase in upfront cash by lenders. The average down payment for purchase rose from 15% to 20%. For a $200,000 purchase, $40,000 is required, which for young house hunters is too high. In New York City, the median price for a home is $800,000. That needs $160,000 upfront cash.

National Association of Mortgage Brokers President Mike D’Alonzo remarked that for an unbelievable buyers market, the activity is less than expected.

An even tougher situation is awaiting buyers today. Federal regulators proposed rules last week that discouraged and restricted risky lending.

Banks will be required to keep 5% of some loans, specifically those with less than 20% down payments, on their books rather than selling them all as securities. As a result, banks may be unlikely to issue with less than 20% down.

National Association of Homebuilders CEO Jerry Howard said that this is the first time in 100 years that the government is discouraging people to buy homes.

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