Absolutely not!  Even though my catchy headline (I should stop thinking so highly of my writing ability) would have you think that the sky is falling and the world is ending, the truth is it is not.  There are still many ways for a buyer to purchase with a limited down payment and still get a great deal on a mortgage.  It is more important then ever to understand what a declining market is and how to work around them to continue to serve your clients.

Declining markets may pose an additional hurdle for some homebuyers who have little to nothing for a down payment.  Buyers who have down payments of 5% or greater will notice little to no difference.  Keep in mind that low down payment options are still abundantly available for many buyers.  It just may require a little more work and creativity in loan structure to get the deal done.

In 2007, declining markets became a part of the mortgage vocabulary once again. Fannie Mae, Freddie Mac, PMI companies and private investors all began to seriously consider the risk of maximum financing in markets where property values have been declining. This resulted in several declining market policies from all of these companies. It is important to note that all of them may have slightly different methodologies and rules regarding declining markets.

So what makes for a declining market? If you are dealing with Fannie Mae and Freddie Mac, a declining market is defined by any of the following three methods:

1. A message triggered by the automated underwriting system telling you that the property is located in an area where property values are declining or difficult to determine.  This message for the most part guarantees a minimum required down payment of 5% on owner occupied properties and 15% on investment properties.  While Fannie Mae does allow the underwriter to override the automated system with strong verifiable evidence and support from the appraiser, it can be difficult to get an underwriter that will approve the loan.

2. A completed appraisal report where the appraiser indicates a declining market, even if not determined to be in a market with declining values by the automated system.  This scenario would once again result in a decrease in the maximum allowed to be financed.  

3. The underwriter in their sole discretion can choose to determine that the property is in a declining market.  This is true even if the automated system and the appraiser both do not classify the property as being located in a declining market.  An underwriter may reach this conclusion based on statistical data as well as the information found in the appraisal.  In other words, the appraiser may all but tell the underwriter that the property is located in a declining market.  In those cases, the underwriter at their discretion may opt to reduce the maximum financed or the value of the property.  This has always been the case on conventional mortgages but as a rule of thumb is almost never done.  

Does a declining market kill a deal?  Not necessarily, it just means the structure of the loan may need to be changed to assist the client in still purchasing a home.  This is where the experience of the lender is vital.  Options are the key to getting deals done.  There are still several options out there, including down payment assistance options that allow for up to $7,500 in assistance from the State of Michigan, Govenment loans and private down payment assistance programs.  In addition, Buyers purchasing a HUD repo can get a down payment as low as $100 and up to $2,500 towards closing cost from HUD.  Did I mention, Realtors can get a bonus of $250 to $500 depending on the financing selected by the client.  I will expand on the details of these programs in future post.  If you need info on these programs now, please contact me.

Where are the declining markets?
How do I deal with declining markets?
How does this effect my clients and their mortgage?
What are the alternatives?

Those questions and many more will be answered over the next several weeks.  Over the next several post, I hope to give you all the tools you need so you can continue to be the expert to your clients.  Most importantly, it is my goal to help you continue to sell more homes, irregardless of the market conditions.

Don't hesitate to contact me if you need assistance on a deal or you have a deal going sideways due to a declining market. 

While the market may pose new challenges, in every challenge there is great opportunity.