Banks Need More Money

Buyers may need 5% more down payment to buy homes that are designated to be in a declining market. By the way, the entire state of California (including real estate in Palos Verdes) is considered a “soft market” by Freddie Mac and Fannie Mae. Kenneth R. Harney of the Washington Post wrote an excellent article on April 26, 2008, entitled “Declining Markets and Self-Fulfilling Prophecies(which was reprinted in the April 27th LA Times) which is a real “heads up” to buyers, sellers and realtors.

For the past couple of months, lenders have been telling me stories about borrowers who are pre-approved but during appraisal review on the purchased property, they are suddenly told by the bank that they must come up with an additional 5% down payment as the property is in a declining market. The appraiser must actually check one of the three boxes on the form that is submitted to the lender – “declining market”, “stable market” or “increasing market”. The lenders consider any area with over 6 months supply of inventory to be in a “declining market” which then triggers the bank to request an additional 5% down payment from the buyer in a purchase (or 5% less cash to borrower if a refinance). This can be a very unhappy surprise to the buyer who does not have the extra money sitting in his account.

This is also an unpleasant surprise to the seller who has taken his property off the market while the buyer is in the inspection and loan contingency stage. A wise seller will want to know if the buyer has some “backup cash” to cover this possibility. Realtors representing both buyers and sellers need to be aware of this potential issue to help guide their clients to a smooth closing.

Conventional loans with 20% down payment may no longer be the norm. I am told that Wells Fargo has recently notified mortgage brokers that FHA loans will also have the same “distressed market conditions” requirements.

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