Declining Markets Policy

Have you heard a mortgage lender or Realtor talk about a “declining markets policy” lately? A declining markets policy is a policy by a bank or private mortgage insurance (PMI) company, which says that in a real estate market with declining values, you cannot get maximum loan-to-value (LTV) financing on a Conventional loan. Most banks and PMI companies have defined all of DC, different parts of MD and most of Northern Virginia as declining markets.

What does this mean?

The mechanics of this means you have to put an extra 5% down payment down in some situations, on a Conventional loan.

On Conventional loans up to $417,000 (called Conventional Conforming loans) you used to be able to borrow up to 95% LTV and put 5% down payment down. In a declining market, you now have to put 10% down payment down.

On Conventional loans up from $417,001 to $729,250 (called Jumbo Conforming loans or Conforming Extended loans) you used to be able to borrow up to 90% LTV and put 10% down payment down. In a declining market, you now have to put 15% down payment down.

Is an FHA loan an answer?

One answer to avoiding these increased down payments on Conventional loans is to instead get an FHA loan. However, FHA loans come with much higher PMI costs. However, if you want to avoid having to come up with a larger down payment, FHA is the answer.

See below for an example:

Conventional loan
$500,000 sales price home
95% loan = $482,500 loan amount
PMI up front cost = $0
PMI monthly cost = $308
PMI cost over 4 years = $14,784

FHA loan
$500,000 sales price home
96.5% loan = $475,000 loan amount
PMI up front cost = $8,443 (which is financed into the loan typically)
PMI monthly cost = $221
PMI cost over 4 years = $19,051

The “declining markets” policy got scrapped?

And you may have heard that Fannie Mae scrapped their “declining markets” policy. It required loan underwriters to boost minimum down-payment requirements by 5 percent in areas where home prices are falling or difficult to determine. But that does not mean that some banks have not kept the policy. And all PMI companies have certainly kept this policy in tact. So the problem is still with us.

And the larger down payments caused by these declining markets policies are no small event. With housing prices where they are in the DC Metro area, another 5% down stings, especially in an economic climate where we are all watching what we spend.

See the below for a table of median home prices in DC:

Median prices for DC homes
2005 median price was 489k
2006 median price was 499k
2007 median price was 529k
2008 median price was 500k
2009 median price was 427k

Median prices for DC condos/coops
2005 median price was 375k
2006 median price was 354k
2007 median price was 350k
2008 median price was 360k
2009 median price was 360k
(data from www.gcaar.com)

If you are buying the median home in DC in 2009, another 5% down payment means another $21,350. I have seen these declining markets policies in the past, and they do not last forever. But while they are with us, homebuyers should be aware of them, consider FHA loans, and go over the numbers and all costs carefully with a recommended mortgage broker or bank.