MIAMI, FL - You did not buy real estate during the bubble. You sat still while it seemed everyone and their aunts were earning unheard profits flipping homes during our latest real estate bubble. You did not take mortgage loans you could not afford nor lied in such loan applications about your income. You were a prudent, patient and savvy person who did not follow the crowd.
Now you feel that it is time to reap the benefits. Time to buy that lovely condo in Miami Beach for half the price everyone and their aunts were paying at the top of the market. It is time to reward yourself.
Surely with a high credit score due to your timely good payment history, plus your steady income and saved closing costs you will qualify for a mortgage loan, especially when they are historically very low and to top it off if you are a first-time buyer you can qualify for a nice $8,000 tax credit (until December 1, 2009).
Great, huh? It is unless you can come up with the 20% down payment for the condo unit.
If a condominium unit can be purchased for $250,000, most likely and assuming the building is approved by either Fannie Mar or Freddie Mac (if they are not it will be even tougher to get a loan), you will be required to put a 20% down payment or in this case $50,000 towards the purchase. That is not part of the usual closing costs (such as title insurance, inspections, lender fees, etc…). A lender will finance 80% ($200,000 in this example) and you must come up with the other 20% ($50,000).
In normal times a buyer could have borrowed the difference up to 100% by either paying for Mortgage Insurance that would protect the lender in case of default or by taking a 2nd loan (usually a Home Equity Line of Credit-HELOC) for the difference.
However as we all know it, these are not normal times and the companies that offered mortgage insurance have stopped writing policies for condominiums in Florida. Not surprising given the amount of losses that they took. Additionally lenders have cut their Home Equity Lines of Credit when it involves using it as leverage to purchase a condominium in Florida.
So now our prudent buyer must come with a nice chunk of money to put down as a deposit. Not many prospective buyers would have $50,000 saved towards just the down payment of a $250,000 condominium which in South Florida it is hardly a luxury condo.
As a result many condo units stand empty and devoid of buyers, who are ready, willing, have good credit, a decent job but do not have besides the closing cost the entire 20% of the value as a down payment.
Therefore many buyers are looking for Single Family Homes, which in many cases can be bought with mortgage insurance or under a FHA program (there is a FHA program for condos but I will explain in another article its own issues).
Until a way is found to facilitate many qualified buyers to buy a condominium unit without having to put a down payment of 20%, condominium prices will be pressured as many buyers are shut-out and many sellers lose them to foreclosure due to their inability to keep up with the payments or sell it in the current market.
Source: examiner.com