Current home price trends indicate that home values continue to decline in many markets across the country, including eastern Massachusetts, Cape Cod and the Islands. What does this mean?
When a property is located in an area that has been identified as in a declining market, Fannie Mae (FNAM) requires the lender to offer financing at loan-to-value (LTV) and combined loan-to-value (CLTV) ratios that are five percentage points below the maximum ratios allowed for the selected mortgage product.
What this means is, if a buyer is purchasing a property in a declining market and wants to put just 5% down (95 LTV), s/he will need to come up with another 5% for the down payment - for a total of 10% down. Instead of doing a 95 LTV, the maximum mortgage amount they'll be able to do is 90% of the purchase price of the home.
Appraisers are required to note whether a property is in a declining market or not. And, even if the appraiser doesn't make notation of it, mortgage lenders are also required to make due diligence to validate current housing trends and not rely solely on the information reflected in an appraisal. The application of the maximum financing in a declining market policy will not apply when the borrower has an existing Fannie Mae-owned or securitized first mortgage and is requesting a new limited cash-out refinance mortgage.
When the lender becomes aware that a property is in a declining market, the LTV for the mortgage loan must generally be adjusted to five percentage points below the maximum for the specific mortgage product. However, if the lender has evidence that the property is not located in a declining market, the lender may offer the maximum financing for the loan product. Should the lender choose to offer the maximum financing, the lender must be able to provide documentation that supports its assessment that the property is not located in a declining market.
On a positive note, the application of the maximum financing in a declining market policy does not apply when a borrower has an existing Fannie Mae-owned or securitized first mortgage, and is requesting a new limited cash-out refinance mortgage.
East Bridgewater, MA 02333
Lew Corcoran, ASP®, IAHSP, IAHSP-CB