As the real estate and mortgage markets continue to recover, we are seeing more and more restrictions on lending to try and right the ship. One monster that started to surface way back in July of 2007 was the "Declining Markets" guidance sent out by FannieMae (Federal National Mortgage Association). In short, FNMA began to notice in their massive data base that there are areas of the country that are seeing consistent declines in market value, yet they don't have a standard industry definition of what constitutes a declining market.
So what does this all mean?
Well, if your lender receives this message when underwriting your conventional mortgage loan and you are not putting any money down, you will be penalized. (An FHA loan is another option.) The lender must immediately lower the highest acceptable loan-to-value ratio by 5%. So, your 100% loan just became a 95% loan, no matter how you slice it. You may be out of luck when looking at conventional financing. One action that you can take to avoid the surprise of this scary, but protective rule is to have your lender run your file through the automated system before even making an offer. This way you will know up front if you will be dealing with this issue on this property regardless of sale price.
In the past, an appraiser had a little lead way in determining value. The appraiser may have been able to go slightly out of area or scope of time, but Not any more. While the following are always considered the best practice, they are now considered the ONLY practice.
These guidelines are not intended to be all inclusive and may differ depending on the lender. They should be viewed as the minimum requirements used to set the market value by using data for comparable properties:
- Must be within a 3 to 6 month period, with similar features such as square footage.
- Must provide days on market for the subject property and comparable sales used.
- Must be within close proximity of the subject property, looking at neighborhood character as well.
- Must be within a one mile radius of the subject.
- Must provide one current listing or pending sale from the Multiple Listing Service to help support value.
If any of these guidelines cannot be positively addressed or supported in the appraisal, the appraiser needs to provide a detailed written explanation of the circumstances.
There are a few other solutions. For example, FHA and VA do not have an issue with properties located in declining market areas. They leave the determination to those is the field that they trust, the lender and the appraiser.
The bottom line is that while this rule may cause some headaches, but it does not mean that houses can not be sold. It does mean that you need to make sure your lender is up to speed on these changes to assure a smooth transaction.
Getting pre-approved with a mortgage professional before you start looking at properties is more important than ever, because you need to decide which mortgage program will work best for you.
You also need to understand that mortgage guidelines can change even during your loan underwriting process, so don't be surprised if you are asked to provide additional information.
This post was co-authored by Dan Weis and Rick Pilger.
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