Loan to Value Restrictions


Ah yes, the good ol' days.  Remember those spring/summer mornings back in 2006 when you would have over a hundred prospective homeowners camping outside the sales office of XYZ Builder waiting for their opportunity to put down an earnest money deposit on a to-be-built home?  The glory days when it was common for the sales person sitting in that sales office to make well over $200,000 per year?  Ah yes, the good ol' housing bubble.  This is what you would see if you stopped by any number of sales communities in Las Vegas, California, Florida, you name it. 

There were cab drivers, construction workers, you name it buying $400,000 homes with nothing but a CPA letter and signed 1003.  Remember the SISA (Stated Income Stated Asset) Loan? How about the NINA (no income no asset) Loan?  Sounds funny doesn't it?  I'm not making this up, these were actual loan programs and were the soup du jour at most of your lending institutions.  How about the infamous Fannie Mae Flex 100 or the 80/20?  Home values were going up $10,000/month and everyone wanted a piece of the pie. 

Well guess what folks, it's time to pay the piper.  What goes up must come down.  We are now paying for our past transgressions and are paying dearly.  Right now you can't give a property away in many parts of Florida and Michigan.  The air is being let out of the balloon. 

So where are we now?  What is the current state of the market?  What are lenders doing now to protect themselves from dropping home values?  Enter the soft market.  A soft market is defined as an area where home values are declining or there is an over-supply of homes in the area.  Ok, well you could make a pretty good case that the entire United States is a soft market right now.  There are different levels or categories of soft markets level 1 soft markets being the least danger and a level 5 soft market being the highest danger area or area where home values are declining the most or most rapidly.  So what are the category 5's, the major problem areas?  Florida, California, Michigan, Vegas, the usual suspects.  Mainly the areas where you saw the fastest appreciation of home values in the boom years are your category 5 soft markets today. 

So how does this affect me and my loan?  Well, if you are planning on buying a home in one of the category 5 soft market areas, plan on putting an extra 5% down.  Don't plan on putting less than 25% down on a 2nd home or investment property in Sin City right now.  What about an owner occupied property?  10% down, minimum on conventional loans.  Buying a condo or town home in a soft market category 5 and want to do a conventional loan?  Prepare yourself for 20% down amigo and that is for owner occupied.  Ouch.  These are the cards we have to play now.  How long will current market conditions dictate these higher down payment requirements?  Good question.  As a Loan Officer or borrower you simply have to realize that the market is completely different than it was 5 years ago so take your medicine and adapt.  Or go FHA.