Friday, July 25, 2008

Tightened Restrictions and Rising Interest Rates

In light of all of the problems being had by Fannie Mae and Freddie Mac, interest rates have risen rapidly in a relatively short period of time. Just last winter 5.375% was the going rate for a 30 year fixed loan and this week -- 6.75%. In the past interest rates have been in the double digits, so there isn't a lot to complain about yet, but I suspect a lot of people are wondering why they didn't refinance when they had the chance.

In other industry news Fannie Mae has changed its guidelines in order to prevent intentional foreclosures. You've probably already heard that guidelines have tightened so that anyone who has had a foreclosure in the previous five years will not be eligible for conventional financing. So some people have been tricking the lender.

What they do is they purchase a new home stating they will live in the new home and rent out the current home. This helps people qualify because it's more difficult to purchase a rental property, but it used to be relatively easy to convert an existing home into a rental. You could use the proposed rent on your current home to offset the mortgage payment and thereby more easily qualify for the new loan.

So what people were doing is buying the new cheaper, more affordable home under those guidelines and then once the new loan closed, simply walking away from the other house. As a result, you can forget about converting an existing house into a rental with ease (which used to be a great way to slowly build up a real estate portfolio - because you could buy each new house with a mimimal down payment and owner-occupied interest rate), because now everyone will have to both provide a rental agreement (meaning you'll have to rent your house out before you own the new house you'll be moving into) and also you'll have to be able to qualify with both payments.

I'm not as pessimistic as some of the news about FNMA/FHLMC -- they're government agencies and as you know the government takes care of its own (and big corporations), so most likely it's only a matter of time and this will change again.

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9 comments:

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With the near-collapse of the Sub-Prime industry, these loans are already starting to come back into vogue. And they might also turn out to be the saving grace of people who might otherwise find themselves in foreclosure.

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Network Capital Funding Corporation said...

Very useful suggestions. Because of high interest rates home buyers just focus on the repayment of the loan and forget about how they can make money by renting their house. Its really a good way to slowly build real estate portfolio by buying new house on minimum down payments.

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