Declining Markets

As a first time home buyer, you may not yet be familiar with the latest mortgage buzz word “declining markets”.

So you may be asking then, what does it mean?

Simply, Fannie Mae (FNMA - Federal National Mortgage Association) and Freddie Mac (FHLMC - Federal Home Loan Mortgage Corporation), have introduced new rules affecting "loan-to-values" (amount financed as a percentage of home value) for home mortgages originated in designated geographic markets.

Fannie Mae and Freddie Mac are US government sponsored public corporations that buy and pool qualified mortgage loans from their originating financial institutions. They then issue securities backed by their guarantee (and not that of the US government) against the mortgage pool for sale in the open market to provide fresh funding for home mortgages. Fannie Mae, as it is popularly called, is the largest US player in the secondary mortgage market, while Freddie Mac is the second largest US player in the secondary mortgage market.

As stated by Fannie Mae:

“Current home price trends indicate that home values continue to decline in many markets across the country. As a result, and based on our continued monitoring of loan performance, Fannie Mae is reinstating a policy to restrict the maximum loan-to-value (LTV) ratio and combined loan-to-value (CLTV) ratio for properties located within a declining market to five percentage points less than the maximum permitted for the selected mortgage product.

The reinstatement of the maximum financing policy and the other changes outlined in this Announcement are necessary in light of current market conditions. These policies are effective for all loans delivered with application dates on or after January 15, 2008.”

How does this affect home buyers in Pinal County?

Let's say that you have applied for a mortgage based on a purchase price of $200,000, with a 5% down payment. Without "declining market", you could borrow $190,000 or 95% (95% Loan-to-Value) of the purchase price.

However, if the home you are buying is deemed to be in a "declining market" by Fannie Mae or if the lender's real estate appraiser determines that it is located in a "declining market", you can now only borrow 90% (instead of the 95% you originally requested), thus requiring that you put an additional "5%" down. In this scenario, you would now be putting a total down payment of 10% (or $20,000) and borrowing $180,00.

This does not necessarily mean that you won't be able to get 100% financing/zero down mortgages anymore. But, it sure is a great incentive for Pinal County first time home buyers to look into Pinal County Down Payment Assistance, as the amount of assistance to eligible home buyers could be up to $20,000!

What is PMI (Private Mortgage Insurance)?

PMI (or Private Mortgage Insurance)

is usually required when you purchase a home with less than a 20% down payment. Designed to protect lenders against the costs of foreclosure, PMI is most often provided by private mortgage insurance companies, such as MGIC (Mortgage Guaranty Insurance Corporation), GE Mortgage Insurance, et al.

PMI is an additional expense typically collected with your monthly your mortgage payment. The cost (monthly premium) of PMI varies depending upon the size of the down payment or, from the lenders perspective, by the Loan-to-Value (LTV). The cost of this monthly premium is higher for lower down payments.

Can PMI ever be cancelled? Yes, here are a few common ways:

Once you feel that the mortgage balance as a percentage of your current home value is at least 80% (Loan-to-Value or LTV), you may contact your lender or mortgage servicer. In most cases, an appraisal will be required to determine the value of your property, the cost of which you can expect to pay. Although there is no law requiring lenders to remove PMI even if an appraisal supports a value of your home sufficient to bring the LTV down to 80% or less, many lenders may do so, after taking additional information into consideration, such as your mortgage repayment history. If you've been late on your mortgage, that may have a serious impact on the decision to remove PMI.

Another thing you may do is try to refinance into a new loan without PMI as long as the appraised value on the new loan supports at least an 80% Loan-to-Value.

Is PMI tax deductible? As of January 1, 2007, Congress passed a bill making Private Mortgage Insurance a tax deductible item for new borrowers whose adjusted gross annual income (personal) is at or below $100,000. The benefit for millions of new homeowners is a potential savings of hundreds of dollars in reduced tax liability (thereby reducing the cost of financing) or an opportunity to afford a slightly more expensive home. Consumers can now breathe a little easier in their dislike of this much maligned mortgage related expense.