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Negotiating a Mortgage Post Subprime Collapse

By manybanking.com Staff
Prior to the subprime mortgage collapse, home mortgages with no down payment requirement were quite common. Because home prices had been rising rapidly for almost a decade, most buyers expected to gain equity from appreciation alone.

However, when housing prices started to fall, many homeowners found that they were “underwater” on their mortgage.  In other words, they owed more on their properties than the homes were worth, also known as negative equity. If the homeowners had made down payments when they got their mortgages, some or all of the loss in home value would have been absorbed by the down payment equity.

Today, virtually all 100% financing options are extinct. Most private lenders now require a 20% down payment for financing. Those who have good-to-excellent credit can find loans for as low as 5% down payment in some areas, but these loans are not nearly as common as they once were. Paying lower down payments will save buyers cash up front, but it could end up costing you more in the end.

For starters, paying less than a 20% down payment requires purchasing Private Mortgage Insurance (PMI). PMI covers a lender’s losses if the home is foreclosed on and sells for less than is owed the lender. In the past, PMI could be avoided by using “piggyback” loans, or second mortgages to cover the difference between the down payment and 20% of the purchase price. Tightening in the lending market, however, has made it increasingly difficult to obtain a second mortgage. Even PMI can be difficult to obtain in some areas that underwriters determine are not worth the insurance risk because of depreciating home values.

That said, now is still a good time to buy if you can quality for a mortgage. Home prices are finally affordable and mortgage rates haven’t been lower for decades. Homebuyers do face a risk of home prices falling more in the short-term, but in the long-term they are likely to go up.

Getting a mortgage these days is much more difficult than it used to be, but qualified homebuyers can still get good deals. If you have a good credit score (above 700), stable employment and a low debt-to-income ratio, most lenders will be eager to work with you. Those who have less than perfect credit and low down payments can also turn to the Federal Housing Administration (FHA) for loans.

Because lending standards have tightened so dramatically, you might think you are in a weak position when dealing with a lender, but that’s not necessarily true. Well-qualified borrowers can still negotiate discounts on closing cost fees and interest rates, particularly if they have significant down payment.

One of the best ways to negotiate the best terms with a lender is to get competing offers from other lenders. Use those offers as a bargaining chip. For example, if one Lender X offers a better rate but higher closing fees than Lender Y, ask Lender X to match Lender Y’s closing fees.

In the end, the lending market may have contracted with the economic slowdown, but premium borrowers are still valuable to lenders. Use the manybanking.com resources to find and compare mortgage offers in your area at manybanking.com.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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