The Moderate Income Mortgage Squeeze
The fallout from the recent financial crisis is yet to reach its full potential, however, the signs are there on the horizon and for those on moderate and low incomes, the news is not good. With Congress making moves to remove Fannie May and Freddie Mac away from mortgage risk, other lenders will have to take full responsibility for mortgage loans they write.
When it comes to lending money on real estate, banks and other lenders can be quite conservative. When it comes to lending and trading with each other, they play the risk game with gay abandon – at our risk of course – just look at the last couple of years. Conservative lending means one thing – a mortgage squeeze on moderate income earners. Low income earners can virtually forget about home ownership, at least in the short to medium term.
Moderate income earners will find that lenders will reduce their risk, possibly as low as 80%-85%. This means borrowers will need to find 15%-20% as a down payment along with any costs associated with home buying. Fortunately we are not there yet. Lenders are still prepared to lend to 90% and 95% leaving borrowers with smaller down payments to find.
What is unfortunate is that the market is not reflecting these moves. Buyers are still reluctant to enter the market and the long term risk is that they may be squeezed out when they are ready. If you are considering buying a home at some time in the future, and you classify yourself as a moderate income earner, then buying sooner rather than later could be a smart move.
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