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August 01, 2008

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I find it comical that they consider 5% "substantial".

I've bought several houses over the years, and am in the process of buying a new residence right now for an interstate relocation. Here are the differences I've seen from the past:
* A 740 credit score gets you the best terms. 740 is "the new 700"
* In the mortage application there is a whole page with a big FBI logo talking about the million dollar fines and 30 year in prison for mortgage fraud.
* Instead of the old "piggyback" loans of 80 first 15-20% second mortgage to avoid PMI, now they do 5% down and a choice of a higher rate with no PMI, or a lower rate and pay PMI. From my experience paying the PMI resulted in a lower overall payment, though I realize PMI only benefits the bank, not me.

With GM and Chrysler getting out of the automobile leasing business, getting a low-monthly lease rate on a car will become more and more difficult as well.

Given the issues that the lenders have seen with residuals being a lot lower than expected, they've decided that it's not worth the risk.

Tim -

Thanks for the insight. We are planning on moving next spring and wondered what additional hoops there would be to jump through. We're not really worried since we'll have the 20% down (assuming we get even our worst-case scenario for our current home), but it's good to know.

Re: the PMI - I wonder if the tax savings from paying the higher rate but no PMI would make up for the difference in overall payment amount? I guess it's a case by case basis.

Proves that the press will always have something to complain about and the politicians will always have something to fix, since both sides of every issue can be played. What is amazing is how both sides are sometimes played by the same politicians/newspapers in the same week.

The "worst" issues in America that must be "fixed" (so says the government/press) apparently are:

Mortgages are too easy to get (evil lenders loaning to those who can't afford, FNMA/Freddie failure)
Mortgages are too hard to get (this article, and the reason for the creation of FNMA/Freddie)

Homes have risen in value too much (affordable housing)
Homes have dropped in value too much (foreclosures)

Subprime lenders charging extremely high rates (targeting the unfortunate)
Subprime lenders charging to low a rate (they are failing, so margins on rates were too low to cover losses)

Gas prices are too low (we consume too much, waste too much, pollute the environment, D.C. traffic)
Gas prices are too high (it is a necessity and the price is crushing folks)

No wonder the government keeps getting bigger, anything they "fix" requires the problem on the other side of the issues to need a bigger fix.

It is good that lenders have tightened their rules. It is obvious that in the past the rules were too loose. And now we the taxpayer must bail them out.

Kevin - Thanks for asking the question about PMI and tax deductability. It looks like PMI is now deductable if your adjustable income is under $100k, at least through 2010. But there seems to be some confusion and the law has changed a couple times in the last few years. Any CPA's out there that can clarify?

I'm going through this process right now. Only 3% is required for FHA, but it ends up being a wash with 5% conventional by the time the hefty FHA insurance premiums are included.

You have to have excellent credit to be offered a 5% loan, but 5% still isn't substantial by any stretch of the imagination. FMF is right, the story is a bait and switch. Shame on the editors.

Strick: Good point!

Tim - I actually am a CPA but was under the impression that the PMI deductibility was only for loans generated in 2007.

According to my research, you are correct, it is extended through 2009.

Qualified Mortgage Interest, Points and Other Interest Related to Residences: Tax legislation - mortgage insurance premium deduction extended through 2010

Mortgage Forgiveness Debt Relief Act of 2007. The treatment of mortgage insurance premiums as qualified residence interest is extended for amounts paid or accrued after December 31, 2007. Qualified mortgage insurance premiums may continue to receive treatment as qualified residence interest if the premiums are paid or accrued on or before December 31, 2010 and are not properly allocable to a period after that date (Code Sec. 163(h)(3)(E)(iv)(I), as amended by the Mortgage Forgiveness Debt Relief Act of 2007 (P.L. 110-142)).

Learn something new everyday!

It can vary with where and what you are trying to buy. Areas in decline often need 25-30% down. Fees are going up. Condos are frequently difficult to get funding on. If you are buying a repo, you need to keep the price flexible so when the lender tries to extract concessions in terms you can negotiate offsetting price adjustments.

Personally, I find it incredibly annoying that with the prospect of bailing out home buyers who were in over their heads, the mortgage industry is still allowing for home loans to be made with a paltry 5% down. If buyers put more down, they'd have equity as a cushion in a softening market. With that equity, you wouldn't have people walking away from mortgages because they wouldn't be under water. As a CNN article points out (see below), your credit report suffers less if you walk away than if you file for bankruptcy.

"It typically takes three years of a spotless payment record after a bankruptcy before credit scores recover enough for someone to think about buying a home again, he said. After abandoning a mortgage, a person may be able to buy a new house in two years or less."

Responsible lending practices would have prevented overinflated housing prices, and the resulting deterioration of the real estate market that we're currently witnessing. I just wish everyone wasn't paying for the mistakes of select few.

CNN article: http://money.cnn.com/2008/02/06/real_estate/walking_away/index.htm?postversion=2008020711

Wow, very crazy. When my wife and I bought our home, the bank forced us to put 10% down (instead of the 5% we had hoped for). It required some struggle at the time, but two years later we are happy for having done so. We've also paid an extra bulk 10% on our mortgage this year.

Doesn't really seem like 'news'. A 0% down loan in this market would be simply irresponsible on the part of both the bank and the borrower. I wouldn't go with less than 10% myself.

Jim

"these days, home buyers almost always have to make a substantial down payment, at least 5%, "
Wow, when I bought all of my property this indeed was the minimum. I bought the very first one in the 80s with 5% down and two subsequent ones - one in early 90s and one in late 90s with over 20% down. This 20/80 deals is what actually new. I am not even sure in what year this type of loans became a norm.

My friend bought a home some time in late 90s - early 2000s at the time of a very hot booming market, offers above asking, bidding wars; properties disappearing within a week of listing, sellers not talking with anybody who wasn't pre-approved and who didn't have at least 20% down. I don't believe 20/80 were even heard off then: my friend had to borrow from multiple friends when the bank appraisal came up short, and she needed to make up the difference to still avoid PMI. The appraisals hadn't yet caught up with rising prices then.

At any rate, I hadn't even heard of this type of loans until this whole mess started.

5% is not significant. At first glance, I though you meant 20%.

My husband and I are looking to purchase our first home within the next few months. We are still in the information gathering stage about the whole process, but we were planning to put down 10-15%. With all this talk of the tightening credit, we were worried that we might not get a loan. But if 5% is considered "significant," I guess that means we might not have too much trouble.

It’ s very easy to buy things with credit cards. All you have to do is swipe it and the thing is yours. You have to realize that even though you can buy something today without paying, eventually you will have to pay for that item (and interest charges if you don’ t pay balance in full that month). Some people end up paying 10– 15 for a 2 item (after paying all the interest charges).

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