The Washington D.C metro area is an expensive place to buy a house. Fannie Mae and Freddie Mac recognize this and have approved a higher Jumbo Conforming Loan amount for the area, $729,500 (in addition to Washington D.C. this new amount has been approved for a number of the more expensive Metro areas around the country) through the end of 2009. This is good news for home buyers; they can obtain a larger loan while still taking advantage of lower rates and federally backed money.
This has been mixed news for sellers of these properties, however, as it has combined with some other changes in loan underwriting rules.
It used to be that if you wanted to purchase a home that cost over a million dollars, you put together a combination of down payment money and a first and second trust that made up the balance. These loan combos, which were available at all price points, were often referred to as 80-10-10 (10 % down payment, 80% conforming loan and a 10% second) or 80-15-5 (5% down, 80% conforming 15% second). This type of package was almost a necessity because the conforming loan amounts were lower. With new, more stringent underwriting rules and less available loan money, banks are no longer making it easy to put together this type of financing package.
Buyers are left with a desire to have a loan that does not exceed $729,500 and the remainder of their down payment must be made in cash. Understandably hesitant to put more cash in to the home than necessary, buyers are making low offers on properties. These offers are often for homes listed at around 1 Million Dollars but the offers are coming in below that. If a buyer wants to take out a jumbo conforming loan for a million dollar home and put down no more than 20%, the maximum they would offer for the home is $912,000. Anything above this amount is money that they feel they are throwing in to 'sweeten the deal.' Unlike a second trust, which can be increased as long as the buyer can make the monthly payments, most personal bank accounts have a cut-off point.
With the old scenario of combination loans, a home purchase negotiation where the buyer agrees to pay more for the house would result in them adding some money to the second trust, which usually had a minimal impact on their monthly payments. Now that second trusts are not part of the financing picture, any extra money negotiated in a deal needs to come either from the buyers bank account or from their stock portfolio--neither is particularly appealing to most buyers.
Obviously, there are folks who are going to buy homes for over a million dollars that will just not worry about this. But for the folks in the $900,000 to $1,100,000 price range, this is a big consideration. If every dollar of the sales price over $729,500 must be paid in cash, the house prices are either going to come down, or fewer of those houses are going to sell.
Just one more way that we are seeing policy changes result in unintended consequences....
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