Good News and Bad News About Mortgages

by Redfin Blogger | 11 Comments

Some people who flocked to lenders this week hoping to snag a cheaper mortgage following the Fannie Mae/Freddie Mac takeover got an unpleasant surprise. Although interest rates had indeed fallen, fewer buyers could take advantage. From the L.A. Times:21581973.jpg

Although the lower interest rates make it easier to get a mortgage, many lenders this week also raised the minimum down payment they’ll allow on a loan — making it impossible for some people to qualify for a mortgage.

How tough are the new standards?

Home purchasers must put down at least 15% of the purchase price, up from 10%. And if the owner of a rental home wants to refinance it and cash out some equity, the mortgage can now be for no more than 75% of the home’s value, compared with 90% during the housing boom. “No lender wants to make a 90% loan today, because we haven’t hit the bottom yet on prices. If they keep going down it could be a 100% loan next month,” said Jeff Lazerson, president of Mortgage Grader, a Web-based loan shopping service.

Of course, 20 percent down used to be the norm for home purchases. But that was before home prices got out of reach for first-time buyers. How is any first-time buyer supposed to buy a home in Southern California?

It’s no wonder that so many people are buying homes in the High Desert and the Inland Empire, where you can get a newish place for $300,000, sometimes less. Even then, a buyer putting down 15% has to come up with $45,000, plus closing costs. That’s not easy to do.

The only ones who can are the highest-earning couples or — more likely — people who get help from their parents. The rest are doomed to a life of renting in SoCal. They probably won’t stay here long.

On the other side of the equation are the folks with homes to sell. Higher down-payment requirements are bad news for people selling lower-priced properties, such as condos, that are affordable for first-time buyers. Their market just shrank considerably.

Los Angeles must come up with some kind of affordable housing for first-time buyers. A frighteningly small percentage of people and families can come up with $75,000 down to buy the median $500,000 L.A. County house.

Right now, the city is full of move-up housing. But if there are no first-time buyers, eventually there won’t be any move-up buyers, either. The first-timers will be forced into the suburbs, where they’ll commute to work and clog up the roads even more, which is hard to fathom, because they’re already practically gridlocked.

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  • RED

    Any thoughts on how this will affect FHA loans, which allow you to put down 3%?

    RED

  • carlivar

    “Los Angeles must come up with some kind of affordable housing for first-time buyers.”

    L.A. already has that. They are called condominiums. Downtown condos are affordable, for example. Why does everyone require a house?

  • http://losangeles.redfin.com/blog/author/cindy.allen Cindy Allen

    Hi, Red,

    Here’s a new article about what’s going on with the FHA.

    http://www.businessweek.com/magazine/content/08_38/b4100034823411.htm

    On paper, it would seem as though FHA loans are the way to go for first-time buyers. In L.A. County, you can get a loan up to $720K and put only 3% down. However, when I got an FHA loan 15 years ago, FHA was super-strict about making sure its homes met all kinds of construction requirements. If you were buying an older home, all the updates FHA wanted made difficult for that to be an option. Maybe a lender out there can speak to this, but with all the older homes in L.A. County, FHA loans could be difficult to get in L.A.

  • http://losangeles.redfin.com/blog/author/cindy.allen Cindy Allen

    Carlivar, I don’t think everyone wants to live in a condo. People want space and yards, especially when they have kids and/or pets.

  • carlivar

    Then move to Inland Empire and take the train into L.A. Just how it works in New York and Chicago. What’s the problem?

  • ellem

    Low income housing? I always thought it was rentals, with varying degrees of niceness and skeezerishness depending on HOW low one’s income is. If someone cannot save the minimum down payment, they need to be renting — what’s so hard about that? If I cannot afford to shop at Nordstrom’s for all my clothing needs, I’ll go to The Rack or Target or such . . . it’s common sense, I’m not entitled to expensive fashions just ‘cos I may want them.

    As for condos, once one adds on the often eye-popping HOA’s, plus the always imminent increases in the future, they are not a wise decision unless for short term.

  • http://losangeles.redfin.com/blog/author/cindy.allen Cindy Allen

    Ellem, you make a good point. However, there are a lot of folks out there who aspire for more…for themselves and for their families. That was why so many tried to buy homes during the runup; lenders were giving them mortgages, so they saw it as their chance to move up in the world. It’s hard for some to accept where they are and resist the temptations out there. And there are a lot of temptations.

  • carlivar

    Cindy- agreed, it is hard for people to resist temptation. That doesn’t mean the government needs to make sure The Temptation has an Okay Version made available.

    Freedom includes the freedom to fail.

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  • Chris F

    “The rest are doomed to a life of renting in SoCal.”

    That’s a bit harsh, especially since the majority of people living in Los Angeles rent.

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