The mortgage industry is one that is constantly changing. In just the past few years alone, we have seen the elimination of many loan programs with more expected changes on the way. Should homes continue to increase in value, the industry will likely undergo more significant changes. If home values rise, more homeowners will have equity, decreasing the risk of default. Once that risk is reduced to acceptable levels, lenders will start to lend to borrowers with lower down payments. This can create more demand and a larger buyer pool, but this process will not happen overnight.
If you have kept an eye on the real estate market, you have heard positive reports over the past few years about how home values continue to rise. While this is true, it is a bit misleading. Values plummeted to historic levels after the market tanked, leaving up as the only alternative. Higher values is certainly a good sign, but it has been approximately five years and the recovery has been anything but fast.
That being said, if this trend continues, it could lead to promising mortgage loan program changes. Lenders are just now starting to clear out foreclosures and short sales they had on their books. Lenders are in the business of making their money through loaning money, not in managing real estate or selling distressed property. It may be a while, but whenever the backlog is fully cleared, they will look to recapture market shares and loan out money, presumably at higher interest rates.
Knowing that they don’t want a repeat of 2008, you can expect any changes to be slow and incremental at best. The FHA has been a successful program, but with changes coming to their guidelines next year, there will be a void for borrowers looking to put down as little as they can. You can expect to see lenders trot out reduced down payment programs on a trial basis and see how the progress is. Underwriting guidelines most likely will not change and remain as strict as they are today with the notable exception being the reduced down payment. This may open more doors for would-be buyers. If there are more buyers, the demand will be higher, thus creating a home buying market that will increase values.
Do home values rise based on demand or do values rise first and demand follows? We do know that higher home values give buyers and sellers more options. Sellers that were waiting for more equity will be more apt to sell, leaving more homes on the market. Buyers may be able to take advantage of new lender programs with less down if people are buying in mass again. With less money down, new homeowners will be able to see some equity in the first twelve to twenty-four months and provide more options in the event of emergency.
The lending market is constantly changing and will continue to do so for the foreseeable future. If values continue to slowly rise, keep your ears open for new loan products with less money down. This will have a definite impact on the future of the housing sector.