Vail Mortgage Matters column: Are we going down the same path?
In Eagle County — and across the nation, for that matter — buyers can finance homes with very little down payment. In fact, Eagle County residents purchasing a primary residence in the county can potentially finance 102 percent of the purchase price. Three percent and 5 percent down payment options are readily available and so on down the line, so to speak. Every situation is different, so how little down payment is required does vary from scenario to scenario.
But the point is that in the current lending and mortgage environment, there are many options to buy and finance a home with very little down payment. When I detail these options to potential borrowers or discuss the options with business partners and associates, skepticism and concern inevitably arise in the conversation.
Aren’t loan programs with little down payment the culprit for the real estate crash and recession we went through in the mid-2000s? Don’t loan programs such as this tend to cause a real estate bubble that will ultimately burst again? Aren’t we going down a path that we have been down before with no good end?
All of these types of questions are valid and very fair, indeed. I cannot see or expand upon what will happen to the future of the real estate and mortgage markets, but I can answer in great detail what is different in the current lending markets compared to the mid-2000s.
Those of us who were involved in the mortgage and real estate industries in the early and mid 2000s remember all too well what was going on during that time. It is no wonder that the world went through such a dramatic and devastating economic collapse.
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During this period, the mortgage industry existed on what I will summarize as low documentation combined with low down payment-type loans. Low documentation loans refer to those where a borrower may not have to provide any income or asset documentation. As crazy as it may sound, loan programs existed where the borrower could simply “state” their annual income and asset base on the loan application without any need for supporting documentation.
Loans Gone Wrong
Loans that only paid interest were commonplace. As well, there were loans that actually went the wrong way as far as reducing the principal balance. Yes, loans existed that negatively amortized, or where the principal balance increased, not deceased, with each monthly payment as a means of making the monthly overhead lower for the borrowers.
It is not hard to see how conditions and circumstances such as this could lead to a real estate collapse and economic turmoil. Borrowers simply could not afford to pay the debt on the home. The mortgage industry is dramatically different today, as anyone who has financed a home in the past eight or nine years can attest to. While the current mortgage lending and financing process can be arduous and tedious, the current environment has produced a much more stable lending and housing market, in my opinion.
If you are going to buy a house and finance it with a mortgage, then you need to be fully qualified. You will be made aware time and time again as to the total monthly payments and how much money is required to close the loan. Lenders and banks will double and triple check income and assets and will leave no stone uncovered. Money in the bank is required and documented for closing and post-closing, as well to ensure that payments can be made in the case of adversity.
Gone are the days of interest-only loans (for the most part), balloon-type mortgages and negative amortization loans. The standard 30-year, fixed-rate mortgage without balloon or prepayment penalties is the much more stable and less risky financing tool of choice these days. Vastly different lending requirements and guidelines make the current marketplace more stable and secure than what we saw in the mid-2000s.
William A. DesPortes works for Central Rockies Mortgage Corp. He can be reached at 970-845-7000, ext. 103, and firstname.lastname@example.org.