As many of you know it is getting more difficult to get a loan for anything, especially a home. Even the middle class population is seeing a great increase in the number of loan applications declined. Why are banks being so tight with their money, even though many of them accepted millions of dollars from the government bailout program? The fear of loaning money in a declining market, fear of bank failure, and wanting to cover future loans has cause tighter restrictions on home loans even for the upper and middle class.
As home values continue to decline handing out a mortgage loan to just anyone becomes a big risk for a bank. Just a few year ago home values were rising faster thanÂ grandma’s yeast rolls. Banks were lending money to just about anyone because the value of the home was sure to increase and even if the loan fell through the bank wouldn’t lose a lot of money from foreclosure. Today home values continue to drop so banks require 10% and sometimes 20% equity in a home before they will finance or refinance the mortgage.
A second reason banks have decided to filter loan is because of other bank failures. I just visited the FDIC website and counted 63 banks that have failed since January 1, 2008! Banks are scared to make “bad loans” where they won’t get their money back. If they make too many bad loans they’re not going toÂ have enough capital to keep the doors open. The last thing a bank want right now is to be placed on the FDIC website as a failed bank.
A final reason banks have tightened lending practices is for short-term and long-term business reasons. Banks want to keep some of the cash for short-term investments in order to recoup some of their tremendous losses. Â Banks also want to stash away some of the bailout money to cover future losses.Â No matter how careful banks are with their lending practices they are still going to make some bad loans. Things happen and people can’t make their payments. Banks want to ensure they have enough money saved themselves to cover these losses in the future.
Even though there are many new lending restrictions placed onÂ home mortgages,Â it is still possible for the average middle class family to get a home loan. Keep an eye on your credit score and save money for a down payment. As the economy starts to progress lending restrictions will loosen up and banks will start lending money again!