Buying a home in a declining market? 5% more required
Wednesday, March 5th, 2008Buying a home in a declining market designated by Fannie Mae or Freddie Mac?
There are no foreclosures in your neighborhood. There are no boarded up homes with knee high grass on the front lawn. Your neighborhood is solid, with sales prices that have been flat or even climbing. Even so, according to housing lenders, you may live in a high-risk area that will require anyone buying a home there to put up a bigger down payment. Fannie Mae and Freddie Mac are leading the charge, maintaining a list of zip codes that they consider to represent a high risk of home price depreciation. Reasons why there might be a risk of depreciation may include a recent history of rapid price appreciation, and not just a weak local economy.
Being in one of these high-risk areas will require buyers to put down an additional 5% for any given Fannie or Freddie program.
Thus, 100% financing programs vanish, now becoming 95% loan to value programs in a high risk area. Encouraged by Fannie and Freddie, some of the nation’s biggest lenders have also joined in judging the risks of various areas. Some are slicing and dicing area risk into several small pieces with a wide range of risk levels. One of the biggest mortgage insurers, MGIC, has joined in the game of picking potential losers by designating a number of broad statistical areas as “restricted markets,” which subjects them to a different set of requirements.
On the MGIC hit list are all of Arizona, California, Florida, Nevada and the District of Columbia, along with parts of 18 other states. What if your home is in a neighborhood where prices have held up, despite weakness elsewhere in your zip code?
Fannie and Freddie give you a chance to establish that the specific neighborhood where you are purchasing (or selling) is not declining by providing sufficient comparable sales data.
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