As an effect of the sub prime mortgage crisis in the 2007, lenders are no longer lenient when it comes to mortgage approval. Lenders require more documents, as they become more critical in screening borrower. Another effect is the soaring high interest rates. This makes loans even more expensive than they were before.
This just proves that the lending industry is now on a credit crunch.
Causes of Credit Crunch
Credit crunch may be a result of the relaxed financing standards. As mentioned above, sub prime borrowers were given access to mortgage back then. Sub prime borrowers are considered high-risk as their usual credit scores fall below what is favorable.
In those years, housing prices fell and continued to sink. Concurrent to the falling prices was the increasing interest rates. It happened that most subprime borrowers obtained variable rate loans. When they decided to re-finance, they had a hard time getting qualified. Aside from that, the value of their collateral, which is their property, had also sunk. In this condition, most lenders would naturally decline as they have lower security in this transaction.
As a result, these borrowers had problems in payments. They eventually defaulted them. In the end, foreclosure proceedings were initiated and most of these borrowers ended up loosing their homes. But it wasn’t only them who was at lost. Banks were also negatively affected by credit crunch. Since there was a negative inflow of cash, their revenues declined. Their capital also depleted and leverage was extremely high.
No wonder why the industry is on a credit crunch. Lenders have fewer funds to make loans available.
Real Estate is Affected
Due to credit crunching, real estate market is heavily affected. Since most of the interested buyers in the market are not qualified borrowers, consumers have no other way to finance a home purchase. As an effect, there will be reduced consumer spending in the real estate industry and more homes would remain unsold for quite some time. Rental properties would also have high vacancy rates. Moreover, assets that are difficult to sell become more difficult to dispose during these times.
On top of that, any borrower who suddenly incurred financial hardships may have a hard time paying off their loans. Remember, interest rates are not showing signs of declining. As a result, foreclosure rates may continue to increase.
Tips to Potential Homebuyers/Borrowers
What people aim right now is a chance to be approved of loans. This way they can purchase the property, they want. They also aim to get the most economical deals to earn more savings.
To be assured of these deals, here are the following things that you should do:
1. There should be continuous monitoring of credit reports. This assures you that all information on your records is accurate. By the time you obtain a loan, your lenders will be looking at accurate information.
2. Always make timely payments. Keep any receipt you have. Doing this will keep your credit reports flawless. At the same time, having proofs of payment will help you contend any inaccuracies in your credit reports in the future.
3. Since lenders require stack of documents for your approval, it is important to prepare them on hand. Any document that could prove your financial health is very important.
4. Before making mortgage commitments, always shop around for interest rates.
Great articles about real estate can be found in
Maryland Community Guide and
Real Estate in Maryland. You can also find great real estate properties in here.
