The Credit crunch has additionally been defined as a capital crunch. In a capital crunch, there is a shortage of capital available for investment, which limits the amount of money that can be loaned for new enterprises; this has especially been true in areas that were the hardest hit by the recent financial downturn. In a credit crunch, lenders are hesitant to lend, holding onto their capital since the increasing incidence of bankruptcy, mortgage default and rising unemployment makes them fearful of the greater risk of payment default.
As it applies to the real estate market, the effect is a lack of money to fund mortgage loans. There becomes an oversupply of houses on the market, as fewer dollars are available in mortgages. And this in turn means that construction of new homes will be slowed or even stopped altogether because builders cannot sell the homes they have built. This was seen in some areas of the country where bankruptcies and foreclosures added to an already glutted real estate market.
Those involved in job loss, foreclosure and bankruptcy received derogatory information in their credit files, which has led to decreased credit scores. The low credit ratings make it almost impossible for those people to get loans, especially loans with reasonable terms. Further, given the increasing bankruptcies, defaults and foreclosures, banks clamped down on their lending criteria until their standards became excessively restrictive.
Borrowers who normally would have been approved for mortgage loans were unable to obtain them. As fewer people were able to buy houses, there were even more surplus houses on the market that couldn’t be sold. The excessive number of houses for sale must be resolved for the market to rejuvenate, but several factors, not the least of which is inordinately restrictive mortgage lending policy, are creating a drag on the recovery.
Yet another negative impact on the real estate market has proven to be the corrections in price, as some regions have seen home prices plummet in the amount of 25% or even higher. For some, the value of their home fell so dramatically that they found themselves owing more on the mortgage than the house was worth, which prompted them to quit making their mortgage payments and therefore fall into foreclosure proceedings rather than to remain in such a condition.
For those purchasers who are struggling to get financed, the smartest practice remains not panicking. They ought to keep doing all of the things possible to improve their credit, mend their credit reports, and to boost their overall credit scores. As restrictions ease, they will find it easier to qualify for a mortgage loan, and they will eventually get into the house that they want.
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categories: real estate,home improvement,finance,family,investment
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