Low Interest Rates Are An Illusion

We hear about historically low interest rates on home loans practically every week. Rates on 30-year fixed mortgages are well below 5% and still falling! Interest rates like these would have home buyers lining up to buy any available real estate in any other market. So who is getting these super low interest home loans? Very, very few people. What’s wrong?

The fact that so many homeowners are upside down on their mortgage is the root of the biggest problem. Over the last few years property values have fallen significantly in every state. Homeowners who bought their houses when values were higher now owe more than their homes are worth. Even those who bought their homes several years ago are now under water because they took out cash when they refinanced their homes or got second mortgages.

The maximum loan amount is typicallly a percentage of a home’s current value – current value being the key word. It’s not possible for people to pay off their old loan with proceeds from a new loan with a lower balance. That’s true for a refinance or for selling one house and buying another. So even if they are well qualified borrowers, unless they can come up with the cash for the shortfall, they’re stuck.

Unemployment Rates have been very high for a very long time. There are more than a few people who have been out of work for years. There are also a lot of people who are working jobs that are far below their qualifications – and pay less – or working part time jobs. In spite of this, a lot of them are making ends meet somehow. They’ve found creative solutions, including starting their own businesses, cutting back on spending and sending stay-at-home parents back into the work force. Still, proving to a lender that they can make payments on the new proposed loan is difficult. And this in spite of the fact that they can show that they’ve been successfully making payments on their existing loan at a higher interest rate! Changes in employment make it difficult to qualify for a loan even if the income is sufficient. Most lenders want to see two years of employment in the same field to consider a buyer stable. Contract work is not considered stable until it has a two year history, even if the work is in the same field that the person was originally employed in.

The standards for qualifying for a loan have become more stringent. The huge number of defaults can be traced back to lending practices that were too lenient. So banks have tightened up their requirements. They want to see higher credit scores and lower debt ratios than they did years ago. If a homeowner has been keeping it together through falling home values, employment problems and other challenges, the chances that they have near-perfect credit and lots of money in the bank is slim.

First time buyers face all of these problems, except for being upside down on their mortgages. There are not many first time buyers out there with great credit, a hefty down payment and sufficient verifiable income. Fear of losing their jobs or of home prices falling further has detered many of those who actually are in a good position to buy a home. This isn’t a comfortable time for a beginner to take the plunge.

So those tantalizing interest rates that we keep hearing about in the news remain just out of reach. Something that’s technically true, but simultaneously too good to be true.

If you are one of those in a position to buy a new home in San Diego, this is the time to do it. Once the market turns around, interest rates will rise quickly. San Marcos new homes