Many lenders wary of declining home values

Dian Hymer

In areas where it is evident that property values have declined, borrowers may be required to increase their cash down payment by 5 percent. The lender will still make the loan, just not for as much as the borrower requested. This can pose a problem for borrowers who are cash-strapped.

For example, suppose a buyer is in contract to buy a home for $500,000 with a cash down payment of $100,000 and a $400,000 mortgage. The property is located in an area where prices have declined. So, the mortgage is approved for $380,000, or 5 percent less than the $400,000 the buyer requested.

For the deal to go forward, the buyer needs to come up with an additional $20,000. If the buyer can’t or won’t increase the down payment and the purchase contract includes financing and appraisal contingencies, the buyer may be able to back out of the contract without penalty, depending on how the contract was written.

I went to a class given by an appraiser a few weeks ago. On the standard appraisal form, there is a line where the appraiser marks whether prices in the area are increasing, decreasing or stable.

If the appraiser says neighborhood home values are decreasing, the lender will often require the down payment to be increased by 5% which, of course, will kill some transactions and further weaken the market.