Market Conditions: How Hard is it to Get a Mortgage?
The Chicago Tribune has an article in its Chicago Homes section today about how difficult it has become to get mortgages.
As we’ve chattered about, the banks are requiring larger downpayments, among other things. Even the rich are having more difficulty getting loans and have to come up with more cash.
This raises questions regarding the new construction condo market (not to mention the re-sale market as well.)
There are 6,000 new units coming on the market in the next 6-months. How many buyers will even qualify for loans?
From the Tribune:
Those with high incomes buying in prime locations are having an easier time getting financing and anyone rejected by one lender can shop for another, advised James Kinney, president of Rubloff Residential Properties.
“If you’re downtown and have good credit, you’ll get a loan,” he said. “Most affected are subprime borrowers, overbuilt suburbs and prices that don’t represent market conditions.”
Meanwhile, lenders often require borrowers to make down payments of 5 percent to 20 percent or more compared to zero percent to 5 percent down payments a year ago.
They ask for credit scores of about 700 out of a possible 850 points, up from about 600, and may limit monthly payments to 28 percent of the buyer’s gross monthly income rather than 33 percent, said Gaby Jury, a Realtor with ERA Jensen Feinstein Realtors LLC in Hinsdale.
Detrice Loyd, 24, had to put down nearly 40 percent, $65,000, on a $169,000 condominium in Hyde Park to secure her mortgage in May. The process was time consuming and “difficult,” said the day-care teacher.
The affluent may be getting more loans, but they’re also jumping through hoops.
With values declining or not appreciating as anticipated, pre-construction buyers of prime luxury housing are finding lenders with outstretched hands at the closing.
For instance, at the One Museum Park high rise in Chicago’s South Loop, “lenders are saying the unit isn’t appraising out at the level we thought and we’d like you to put in another $50,000,” said Jerry Ferstman, a vice president at Forest City Commercial Group who has been part of the development team. “Often, our buyers can do that.”
A skittish lender’s demands for reams of documents surprised Bob Archer, 69, a real estate investor seeking 30 percent financing on a luxury Gold Coast condominium at 30 Chestnut St. for which he was paying 70 percent in cash.
His lender wanted financial statements from his accountant and two investment brokers in addition to two years of tax returns. “It was a given that I’d be able to make the monthly payment,” he said. “It’s so difficult to buy or sell, that’s why the market isn’t moving.”
Buyers jump through hoops for a mortgage [Chicago Tribune, Aug 15, 2008]
I don’t get it. If the condos aren’t appraising out in One Museum, why are people still buying them at the developer’s list price?
“why are people still buying them at the developer’s list price?”
Two things–maybe they actually want to live there and a “temporary” dip doesn’t bother them and/or their deposit is larger than the “decrease” in value, so it’s cheaper to just close.
My bet is the deposit… I post rarely but keep saying the tightening credit standards and increased pressure on rates upward to compensate for risk are going to be the final kick to make this all fall apart.
When word gets around that the condos aren’t appraising demand will dry up at the list prices. Of course, that would be in a rational world.
IB–I agree. Increasing rates will dry up re-sale supply, too, as current owners will realize that the cheapest home is the one they already own. I suspect that, as in the late 70s, state legislatures (or maybe congress) will invalidate non-assignment provisions in mortgages, to that existing, cheaper financing can be assumed by buyers.
Anybody know how much they have to put down as a deposit for One Museum Park? I am surprised investors are closing on these – I would expect at this point it would be quite a bit cheaper to walk away than have to put more money in.
I can’t speak about OMP, but I have friends who made the mistake of buying a unit at the soon to be finished SONO project off of Clybourn. They had to put 10% as part of their contract, they are expected to close this coming December. So at what point will the lender tell them prior to closing that they will require more money down?
My friends are stretched as it is, so I’m not sure if they can swing more of a down payment. Any thoughts?
Do these new pre-construction condos have financing contingency? If the buyers cannot get the morgage, will they lose the deposit?
Jason R,
If they have good credit its my understanding that the 10% downpayment should still be sufficient. Or if not they can probably shop lenders.
Believe it or not the mortgage requirements haven’t sufficiently tightened _across the board_ yet, at least from what I’ve read. Yes some lenders are reacting quicker than others, but aside from the crazy loans at the margins (subprime, option ARMs) its still possible to get financing for 90-95%. Heck with VA loans its still possible to get 0 down loans.
My understanding is that they will lose the deposit if they do not close… I’m not sure if there are specific exceptions, to this.
The banks are crazy. (For those of you who followed my foreclosure purchase.) When I got my Mortgage, Bank of America appraised the place at $308,000.00, without the kitchen. (I paid $180,000.) I then applied for a HELOC from BOA, and at first everything was fine. Then, all of sudden, they rejected me, saying the appraisal came back at $177,000.00. I told them they were smoking crack.
Anyway, I got a HELOC from INGDIRECT based on a apprasial value of $271,000.00. So shop around.
Still working on the place, I’ll send Sabrina sonme pictures when it is done, its taking some time.
Big wonder Bank of America is suffering billions of dollars in writedowns every quarter: they don’t seem to be able to appraise a property for near market rates.
Maybe they should get out of the home lending market if their appraisal values are subject to 35% swings on a whim..
“the appraisal came back at $177,000.00”
So, BofA appears to have figure out that 1st lien and 2d lien underwriting needs to have different standards. They (whether by design or luck) layed off the risk of the 2d, while still accruing the benefit of any work you do with that $$ to their collateral. This is what all the banks should have been doing all along.
Bofa is on the feds ‘save’ list. The couldn’t give a sh*t either way.
Ah yes, the little guy gets screwed again…
The ability to finance drove prices up and the inability to finance will drive them down….possibly to pre-bubble prices in nominal terms even.
Assignment of existing mortgages could be helpful if it is a 30 year fixed rate, but if the mortgagor is upside down who is going to want that mortgage assigned to him/her…..interest rates would have to get very high to make that an attractive alternative. The freeze up in real estate transactions seems to have little precedence as a result of such broad and steep house pricing declines. I would suspect this is going to take years longer to unwind. So much economic activity is tied up in our mobile economy that the negative effects will be broad. Prices will decline and more people will be stuck in their existing home until inflation outpaces the declines and allows for the mortgage amounts to decline in real dollar terms to the point that the mortgagor is no longer underwater.
The situation is bad…and will get worse for many.
Now the banks are being irrationally cautious, just as we expected they would be.
I mean, having to produce reams of docs to get a loan on a place when you are only financing 30% of the purchase price…. but I’m not surprised because I have witnessed this sort of irrationality on the part of lenders in post-bubble climates before. I remember friends in another city, a doctor and his stay-at-home wife, with impressive net worth and credit ratings, were asked by lenders what college SHE attended, when they were making a 35% down payment, and she had no income- only his was being considered.
A little bit of sensible caution over the past 5 years would have prevented the mess we’re in now. Similarly, irrational caution isn’t going to pay off all the bad loans out there or get the markets moving again.
Each bank will look after its own best interests and will take many steps out of abundance of caution. The bank tightening will get worse.
A little bit of sensible caution over the past 5 years would have prevented the mess we’re in now. Similarly, irrational caution isn’t going to pay off all the bad loans out there or get the markets moving again.
Agreed.
Somehow, I think first time buyers are going to get hit the hardest by this.
Pilsen Resident,
I think first time buyers are being done a huge FAVOR by this. Being prevented from catching a falling knife is nothing if not a favor.
Do you remember a time when you needed 20% down to own a mortgage? We should welcome those times back.
I’m a renter and not the least bit concerned about being priced out of the market temporarily. I never planned on purchasing until I had 20% down to begin with.
Laura- They are not being irrationally cautious. They are all insolvent and Just do not want to write anything themselves.
I agree, Bob. I’m thinking more about the people who scrimp and pinch to save that 10-20% for the down payment, only to be told that more is required.
Shes a day care teacher for christs sake, buying alone. She makes tops, TOPS 35k/year. And THAT is why she had trouble. Shes buying at nearly FIVE times her salary. Factor in any credit problems and outstanding debt and of course you will have issues.
$129K is still too big a loan for someone making $35K a year.
This woman should spring for a smaller, cheaper place, bargain really hard to get a 20% reduction from the ask price, and use half that $40K for a downpayment while keeping the rest in reserve.
Is $104k too big Laura? Cuz that’s what the bank would give her, not $129k.
And, actually checking the recordings, she paid $170k and apparently only borrowed $90k (per recorder of deeds). I don’t know that I’d call SOuth Prairie Hyde Park, tho, even if it’s south of 47th.
$104K is the most she should get for comfort, and only if she has few other bills- no car loan and minimal card debt.
$90K is a better amount. That’s just under 2.5X her income. Remember, the cost of home ownership rises even as you pay down your debt. Taxes increase, maintenance comes due, things need to be repaired and replaced. Moreover, if you are a first-time buyer, you are not yet accustomed to all the calls on your money due to these things. You can’t just call the landlord when the furnace rolls over dead in December and a long wet stain appears on your bathroom wall.
In answer to the question posted about whether there is a financing contingency for new construction contacts, the answer is typically only at the front end of the contract period. Buyers are enticed to make offers early in a new project to take advantage of pre-construction pricing, but they are exposed when it comes to financing.
If their lives change, they lose their job, or as in the case today, access to capital contracts, they are still obligated to close or they risk forfeiting their earnest money. It is for that reason that I prefer the re-sale market. You may have less potential upside (we all know people who made a bunch of money speculating), but you also incur less risk.
1. We don’t actually know her income–A speculated on it (not that I disagree). But how does a 24 yo making $35k come up with $80k in cash?
2. If she had $80k in cash and was carrying a credit card balance, then she’s in long term trouble, b/c that’s just offensively stupid.
3. It’s clear that your financial comfort if not the same as many other people’s. And, again, I doubt that her only source of funds is her wages, as it would be impossible to have saved $80k on $35k/year at age 24.
Jenny:
Thank you for providing information on new condo buying. It helps to have agents posting who know what is going on in the market.