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Home prices in the Untied States continue to soar, and the
remarkable run of real estate as the “must have” investment
continues. The median price of a new home, which only recently
crossed the $200,000 barrier, is now $215,000. The high prices
of homes haven’t deterred buyers; sales in June reached a record
number of units. There is some concern in Washington about the
explosive real estate market, and Federal banking regulators
issued lending guidelines in May that urged lenders to be more
cautious when lending money for home purchases. How have lenders
responded to these guidelines?
They have made it even
easier to borrow money.
It seems rather odd for lenders
to make it easier to lend money after having been warned that
they’ve been lending money too easily, but that’s exactly what
has happened. Some banks have lowered the minimum credit score
necessary to obtain a home loan or increased the percentage of
income that may be spent on a mortgage. Others have introduced
loans that require no proof of income. Still others have begun
offering a wider variety of no-interest loans and dangerous
Option ARM loans, which can actually raise the principal of a
loan after a buyer makes a payment. Why are lenders easing loan
restrictions after being warned that they are too lenient?
The primary reason is competition. The market is red hot
right now, and due to the fluctuations in the stock market in
the last five years, everyone wants to invest money in real
estate. With so many people flocking to borrow money, lenders
want to do as much business as possible. They also want to do
more business than their competitors. By lowering qualifying
standards, lenders can lend more money. It’s that simple.
There are several problems with this scenario. Some
percentage of buyers will always default on their mortgages.
When the standards for obtaining a loan are lowered, that
percentage will certainly increase. While foreclosures currently
remain low, they combination of lowered standards and rising
prices will certainly contribute to an increase. An expected
increase in interest rates would make the situation worse.
The effects of these changes in lending can be felt by
most anyone. If you are considering buying a home with a
mortgage, be careful. Don’t automatically assume that you will
be comfortable making a $3000 house payment just because the
lender tells you that you “qualify” for it. You must still leave
within your own means, and the mortgage broker isn’t really
concerned about that. He or she just wants to sell the loan, and
doing so may not be in your best interest.
If you are
going to take out a home loan, create a budget and determine how
much you can comfortably pay each month. That figure will
undoubtedly be less than what your broker is willing to offer.
Stick with your own figure, and don’t let the fever of the
marketplace sway you. After all, you are the one who has to make
the payment each month.
About the author:
©Copyright 2005 by Retro Marketing. Charles Essmeier is
the owner of Retro Marketing, a firm devoted to informational
Websites, including End-Your-Debt.com, a site devoted to debt
consolidation and credit counseling, and HomeEquityHelp.com, a
site devoted to information regarding mortgages and home equity
lending .
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