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Condo Loan Risk Reduction May be Creating More Problems

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By : Nelson Stewart    99 or more times read
While this current economic crisis has most certainly been at least partially caused by the effects of the poor restrictions set on mortgages and home loans for a variety of types of real estate, home loans have seen a pendulum swing that is threatening to make economic recovery rather difficult at least in the realm of condo purchasing.

In the past and in the build up to our current economic struggle, mortgages for a variety of kinds of homes were fairly easy to obtain even if you were a particularly poor risk for the lenders. Many of the homes bought with these high-risk loans are now back on the market as foreclosed and bank-owned properties.

At present though, the pendulum swing is markedly to the other side of the lending rationale, at least for condominiums. Lenders are making it much harder to get a loan to buy condominiums to reduce the risk in that type of loan; condos generally are a higher risk than a single-family dwelling to start with. So, there are some strict requirements in place to avoid much of that risk taking by lenders including only approving home loans where the purchaser is buying into a building where 51% is owner occupied, at maximum only 10% of the condos can be owned by a single investor, the buyer must provide a 25% down payment, and other stiff regulations relating to the condo building.

Buildings with a high percentage of foreclosures or rentals are harder to get loans for because of higher risks associated with them and the potential for falling property values when condo prices are slashed by owners who're desperate to sell.

The price of condos has been reduced pretty much clear across the board by almost 20% from last year. In some places, years of overbuilding has made for a glutted market which is doubly struggling because there are just less buyers to buy into the excess of units.

The purpose of the new trends in condo lending are to help correct for the sloppy risk taking that helped cause the economic crisis, but it may be too far of a pendulum swing to actually be helpful. What needs to happen to support the economic recovery is not only for there to be more financially responsible lending but more sales overall. The dearth of lending for condo sales is making it harder for anyone to buy them, which makes for more buildings which people can't get loans to buy into. This creates a vicious cycle that we can hopefully pull out of before it makes the condo real estate situation worse.
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