Amy left this comment on one of my posts about the Salem Oregon real estate market and it seemed like it would be a good post.  Amy asked:

What’s the state of the financing market? We hear so much bad news in the media, but I see people buying homes, cars, etc. What is the expected/usual/average down payment required, what is the limit of income to debt ratio, etc?

Some people all scared about there being no financing, but it seems like that is just less financing for those who likely couldn’t afford it anyway; a return to perhaps the days my parents used to speak of where you had to have a down payment of some sort, have a good balance of debt to income, etc.

Question 1:  The state of the financing markets.

Lenders are still hurting and are “hoarding” money to shore up their books.  Many lenders are raising fees for loans to make up losses.  Loan origination fees used to be 1% and now 1.5% is pretty common.  Underwriters are scrutinizing loans like there is no tomorrow right now.  This is not a bad thing, but in the past underwriting would take 2-4 days and now it is not uncommon to her underwriters taking 2-3 weeks to look at and evaluate a borrower.

Money is there for borrowers, it is just tight.

Question 2: Down payment requirements

There are only two loan programs that do 100% financing right now and that is the VA (Veteran’s administration) loans or the USDA Rural housing loans.  Many buyers are going with the FHA backed loan which is a 3.5% down payment requirement.

Lenders love to see a 20% down payment.  You can still do 10% down and there are a few 5% down conventional loan programs but the PMI (Private Mortgage Insurance) payments have gone up from what I am hearing.

Question 3: Loan to value ratios

Ideally your entire debt should not be more than 35% of your income. That’s your entire debt so that includes car payments, credit card payments, etc.  I also suggest that working parents include their daycare costs in that number as well.  Failure to do so will make living very difficult. If you try and buy a home with a higher ratio than that, it is very possible that the underwriter will say no.

I have had a few clients get loans with slightly higher ratios, but they are the rare breed these days.

Comment:  Lack of financing

There is financing.  If someone has low credit scores and no money then, no, they won’t qualify for financing.  Not everyone should buy a home.  In my opinion, if you are renting and you can’t afford to save any money for a down payment, then you should NOT buy a home.

Purchasing a home is not just about the mortgage payment itself.  You have to maintain a home which costs money.  If you don’t have money to stash away for a down payment, you don’t have money to maintain your home.  That is not a good combination.

So…yes, you are correct that there is indeed financing for people that have saved their money and are financially sound.  We are back to the way it has been in the past.  Work hard, save your money, and then purchase a Salem Oregon home.