Declining Market Areas

What is a declining market area?

If you are in the market for a new home, or refinancing your current mortgage, you may have run into this term with your lender.

Fannie Mae has issued new guidelines for properties that are in declining market areas – that is, areas where the value of homes is dropping. With the current credit crisis and the slowdown in the real estate market, many areas across the nation are seeing property values fall for the first time in a long time.

If your property is in a declining market, the maximum loan to value ratio (mortgage amount divided by the value) is decreased by 5%. So, if you are purchasing a home and the maximum LTV for the program is 95%, you must now have a down payment of 10% instead of only 5%.

There are two ways that your property can be listed in a declining market area. First, Fannie Mae is maintaining a database of areas that it designates as declining market areas. If this is the case, your lender will receive a message when they run your loan through automated underwriting that your property may be in a declining market area. Second, since all real estate markets are local, your appraiser may report on the appraisal that the property is in a declining market area. Either way, the 5% reduction in maximum LTV is required.

As far as an accurate value goes for properties in these areas, many lenders are adding appraisal requirements to make sure the property is worth the value listed on the appraisal. The lender may require additional comparable closed sale to be added to the appraisal or the lender pay require the appraiser to get information on properties actively listed in your properties markets.

This is another in a long line of added obstacles to obtaining a mortgage that you should be aware of in this difficult market. Unfortunately, the time to get a mortgage can be greatly increased if the appraiser has to add this information to his appraisal report. For the time being, my branch at WestAmerica Mortgage is requiring additional information on all appraisal reports from our appraisers just in case the property is in a declining market area or in case it will be added prior to closing. So far, this has helped us meet our scheduled closing dates.

Please take a look at other articles on my blog so you are informed about the changes in the mortgage market over the past 6 – 9 months.