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Will I Be Able to Finance the Purchase of a Phoenix Home?

The question of financing a home purchase in Phoenix – or anywhere else – has gotten a bit more complicated in recent months. It seemed that a few years ago, the only qualification for any mortgage was that prospective mortgagees have respiration and a pulse.

Today, with a nationwide slump in the housing market and a wave of defaults on “sub-prime” mortgages, lenders are taking a much closer look at people’s credit histories and incomes. While those under contract to an employer and a reasonably good credit rating should have few problems securing a mortgage loan, self-employed freelancers with “stated income” and those who are “credit challenged” will have a more difficult time of it.

In many ways, what is being seen today is the result of over-exuberance on the part of investors world-wide. This has created many investment bubbles in many different industries over the past few decades. It is this type of boom and bust cycle that governments try to use economic policy to diffuse.

The “sub-prime” mortgage market was yet one more example of this. The growth in the popularity of certain investment securities, namely ABS or MBS (Asset or Mortgage Backed Securities) has allowed the currently deflating bubble to develop. The finance industry created a variety of creative repackagings of mortgages and combined with offering “sub-prime” mortgages to hard working Americans who had dreamed of home ownership, created the current bubble by allowing a large number of previously ineligible borrowers into the market.

The catch was that such mortgages, while initially offering low payments and low interest rates, were “adjustable” – upwards. When corporations got government to raise interest rates, payments for these homeowners would also rise – often dramatically.

The finance industry did not offer these sub-prime loans out of goodness or desire to see working families own their own homes, it was a chance for profit. These mortgages were sold to “mortgage brokers,” who took their cut then re-sold them to financial institutions who declared them “collateralized bonds” and re-sold them to investors. Nothing of real value was produced; it was simply a game of moving money around.

Add into the mix speculators who artificially drove up the value of housing during 2005 and homeowners who took out “equity loans” based on these inflated values, and there was a recipe for disaster all around once the market began to undergo “correction.” Homeowners found themselves owing more on their homes than they were really worth; with defaults and foreclosures, many of the lenders who held these mortgages faced bankruptcy.

What all of this means to you as a potential homebuyer today is that the requirements for qualifying for a home loan are likely to be much more stringent. The good news is that mortgage rates are still at historic lows, and there are numerous programs that allow many people to qualify for a fixed-rate mortgage at a reasonable rate. In addition, Phoenix home prices have leveled out, and because current supply has outstripped demand, it is easier than ever to negotiate a favorable price with a motivated seller.