We hear about historically low interest rates on home loans practically every week. 30-year fixed loans are available with interest rates well below 5%, and they’re still going lower! 15 and 20-year loans offer even lower rates. Interest rates like these would have home buyers lining up to buy any available real estate in any other market. But now very few people are taking advantage of these low, low home loan 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. Many homeowners are finding that their homes are worth less now than when they bought them. 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.
The maximum loan amount is typicallly a percentage of a home’s current value – current value being the key word. 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. Unless a homeowner can come up with the cash to make up the shortfall, they’re stuck, no matter how well qualified they are.
Unemployment Rates have been very high for a very long time. There are more than a few people who have been out of work for years. Many more are underemployed – working part time jobs or jobs far below their qualifications and income. Somehow many of these people are making ends meet in spite of the challenges. They’ve found creative solutions, including starting their own businesses, cutting back on spending and sending stay-at-home parents back into the work force. 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.
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. Requirements for debt ratios and credit scores are much stricter than they were even 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 buyers face all of these problems, except for being upside down on their mortgages. Unfortunately potential first time buyers with sufficient verifiable income, a hefty downpayment and great credit are in short supply. Many of those that can buy a home now are worried that home prices will decline further and/or that they’ll lose their jobs. 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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