POSSIBLE CHANGES FOR HOME MORTGAGES?
Will anyone be able to buy a house following these possible changes for home mortgages?
With all the ballyhooed changes occurring in the financial sector and the government ‘foreclosing’ on Freddie and Fannie, thus dwindling their roles in mortgages, many changes are on the horizon for people looking to get a mortgage. Whether you’re an investor looking to flip for a profit or a Realtor who relies on conventional financing or a potential home buyer / seller, you will be affected by the possible changes for home mortgages:
Possible Changes for Home Mortgages | Increasing interest rates
Currently, rates are extremely low because the government is subsidizing them. But with Freddie and Fannies’ eventual departure (and the tax payers being taken off the hook for potential defaults), mortgages will be considered riskier, therefore, one of the possible changes for home mortgages is higher mortgage interest payments to offset the risk. How much will rates rise? It depends on how far back the government is pulled from the market. US New & World Report listed a potential scenario:
A more likely outcome is a hybrid system in which private lenders bear more of the risk, while the government insures them against catastrophic losses and charges a fee to cover the cost–similar to the way the FDIC insures banks. A recent study by Moody’s Analytics calculates that such a system would raise mortgage rates by about 30 basis points, or 0.3 percentage points. If the whole system were privatized, Moody’s estimates that could push rates up by about 120 basis points, or 1.2 percentage points, compared with a government-run system.
On a $200,000 home loan, this could impact monthly payments anywhere from $40-$160.
Possible Changes for Home Mortgages | Higher down payments
Lenders are going to want to see home owners put some skin in the game. Since the housing bubble burst, home owners who got into houses with no money down found it very easy to walk away from when the going got tough. Therefore, it seems likely that the required down payment on the majority of mortgages will be between 20-20 percent. The requirement to have this much cash as a down payment will drastically reduce the buying pool, especially for first time homeowners.
Possible Changes for Home Mortgages | Fewer fixed-rate mortgages
Banks don’t like such mortgages because consumers can refinance if rates go lower, but banks can’t hike rates if they go higher. Therefore if the government is no longer backing loans, then the 30 year fixed rate will most likely disappear as well. In its place will most likely be 30 year variable rates that readjust to the market every couple of years. These types of loans are prevalent in Canada and Europe. Since both the homeowner and the market are analyzed every couple of years, the homeowners’ credit scores and debt-to-income ratio will have to be controlled better by the homeowner to minimize interest rates.
Possible Changes for Home Mortgages | Conclusion
In conclusion, these possible changes for home mortgages, such as higher interest rates, variable 30 year loans, and higher down payment requirements will reduce risks for Lenders but hurt the chances of average people trying to purchase a house. Younger first time homeowners who haven’t had a strong credit history, have school loan debt, haven’t been employed very long, haven’t acquired enough income for the down payments won’t be able to qualify for these types of mortgages. Entrepreneurs, business owners, and independent contractors are eliminated from the pool of potential buyers as well. When you look at a 20% unemployment rate as well, relying on conventional financing as an exit strategy for real estate professionals is extremely risky. Due to the possible changes for home mortgages, more real estate professionals are looking for alternative ways to buy and sell houses with mortgage assignments.