Banks Loosen Credit; Housing Crisis Over in 2012?

Banks Loosen Credit; Housing Crisis Over in 2012?

Real estate owners all around the United States have felt the impact of the current housing crisis and economic recession. As property values have dropped, many home (and condo) owners have been engulfed by a sense of panic and have become uncertain as to whether they should ride out the “economic storm” or simply try and sell their property at a lower value in this buyer’s market.

Comparatively, the market has affected prospective buyers as well. As property prices reached record lows, many buyers attempted to seize the opportunity to purchase real estate at a bargain. However, as banks were in “defense mode” against lending to just anyone, many of these prospective buyers were facing an uphill battle when it came to financing options. The required credit score to be eligible for home financing rose, the LTV ratio (loan-to-value, discussed later) decreased, and lending amounts to borrowers declined.

Moreover, according to an article by Krista Brock with DSNews.com, “the average credit score required to attain a mortgage loan is 700” (Brock). While this average is higher than it was before the housing crisis began, it has remained constant with the requirements from one year ago. Furthermore, mortgage lending seems to be stabilizing, while it seems as if banks are loosening credit availability. According to Brock, at the low point of the crisis, banks were lending at 3.2 times borrower earnings. Currently, banks are lending at 3.5 times borrower earnings. Additionally, banks are increasing the loan-to-value ratio, which is “the clearest sign yet of an improvement in mortgage credit conditions” (Brock). The loan-to-value ratio is a lending risk assessment that lenders (and financial institutions) examine before approving a mortgage. The LTV is calculated by taking the mortgage amount and dividing it by the appraised value of the property. In essence, the LTV is a clear dictation as to what percentage of the property’s value is being financed.  An increasing LTV means that banks are loosening the down payment requirements from borrowers. A higher LTV means that buyers are financing a larger percentage of the property value, which in turn creates greater risk to lenders. In mid-2010, LTVs reached a low of 74 percent, while they have currently risen to 82 percent.

While it is in fact good news that banks are lending again, there are still those who are struggling with credit requirements. According to Brock, in “November (2011), 8 percent of contract cancellations were the result of a potential buyer not qualifying for a loan.” Therefore, while the economy has seen improvements and the end of the housing crisis seems to be on the horizon, the real estate industry should see more “wins” moving into 2012. More people will be able to not only buy, but also be able to afford what they buy. It will be a universal effort from financial institutions and lenders to appropriately evaluate each and every potential buyer, maintain credit standards (not setting them too unrealistically or too loosely), and help homeowners and investors purchase property in a responsible manner.

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