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Is 3.5% down "responsible" if houses are still experiencing double-digit losses in value?

Profile picture for socal_engr
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Since November 2009

Just a thought...

How "responsible" is a loan product that may well have the buyer upside-down within 12 months of purchase?

I know that no one can really predict the market, but...
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August 13 - US
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Profile picture for NJShoreMortgage
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Since August 2009

SoCal,

Monday Morning QB is easy. If the market were up 10% year over year you might ask why lenders aren't allowing 0% down loans any longer. It's easy to say that 3.5% down is "risky" when the market is still stressed and values are declining overall. But first time buyers, who are most often young, optimistic and eager to start their own familes and buy a home are not worried that the property they buy today will be worth less in 5 - 10 years. Plus most of them don't have 20% down.
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August 13
Profile picture for socal_engr
Contributions: 832
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Since November 2009

Rudi,

I appreciate your position, and have to assume that you lose out on some business due to it. I'm also fairly certain that there are other lenders who take similar positions.

Unfortunately, there's a large segment of the population (not just lenders, but people in general), who are simply out to make a buck and don't worry about what might happen to others down the road. And history, both recent and prior, tells us that there is an even larger segment of the population who are able to be taken advantage of.

...Happy lending.
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August 13
Profile picture for Gregorio Denny
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Since January 2009

Mr and Mrs Smith rented a 4 bedroom, 1800 Sq ft property in the East Bay Ca in 2006 for $1800/month. Property at that time was "worth" $500,000.

In 2009 property goes into foreclosure, Mr and Mr Smith buy said property on a short sale for 220K on a FHA loan with PITI of $1614.14 and 3.5% down, seller paying closing. Please explain how this is bad.

It's all about qualifications. It's easy to say you don't do FHA loans when you are not approved to do them. Virtually all programs in California require low LTV due to MI constraints except FHA. Are you saying you won't do a loan for someone for 417K at 90% with an 800 Fico and 500K in reserves? That's not noble, it's silly. FHA loans have a purpose, especially in California where 3.5% on a 600K property is not the same as Kentucky and 3.5% on a 60K property. Most of my clients that put 3.5% down on high value properties do so because they have other intentions for their money and know how to manage it. They understand they are buying a depreciating asset and that is exactly why they choose FHA. When you qualify and pre-approve clients properly, they don't default.
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August 13
Profile picture for CA UMB
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Since January 2009

SoCal,

FHA's first payment defaults tell the story. It appears that FHA will soon need a Government Bailout like Fannie / Freddie received. There is speculation that one government agency may replace all three. Time will tell.

If you go to my website on my home page I state my maximum LTVs per product line. By personal choice, I do not originate any loan over 80% LTV. There are many other places a borrower can go if this does not meet their situation. .... Rudi
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August 13
Profile picture for socal_engr
Contributions: 832
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Since November 2009

Gregorio,

Not sure I can follow with your automobile example. There are many things purchased with financing (e.g. cars, boats, electronics, furniture, etc.) that are consumables - they are expected to last for a certain period of time and then get replaced.

While I agree that residential property (vice income, a different world) should not be looked at as an ATM, I do not view this type of purchase in the same way as a consumable.

I understand and agree with the general rent-v-buy guidelines, it's just that I see a lot of posts on this board where it seems people are stretching to get into a house with the 3.5% down - and there seems to be very little room for "issues" after the purchase. Maybe there's an argument to be made for people getting in while the prices are still down - especially those who were left on the sidelines before. But, there's still a part of me that says "people do not always make good decisions, and giving them the tools to make a bad one isn't kosher."

I know a good LO will attempt to counsel, but how many LOs have actually refused to fund a loan that a person qualified for...even if they had misgivings about where the process was going to end up?
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August 13
Profile picture for Mortgage Finance Pro
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It is "responsible" as long as you can afford to make to required payments and plan to do so regardless of what happens to the value of the property.
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August 13
Profile picture for Gregorio Denny
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Since January 2009

It's responsible if there are realistic expectations. Someone looking to stay long term can benefit from purchasing homes, for example, in the east bay of California for 200K that sold for 500K last year. To rent these properties would cost the same or more than the PITI. If someone knows that what they are getting into is a home to live in and not an ATM machine, then it makes perfectly good sense. We need to get things back into perspective. No one blinks an eye about financing an automobile that depreciates the instant you drive it off, but they scoff at the notion that a home may depreciate. It's the reality of the times and if you want a nice place to live and raise a family, then buy something and love it for a long time.
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August 13
 

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