While the national real estate market is back on the up and up, some cities across the US are still trying to recover from the crisis that hit in the early 2000s. Detroit is one such city. Purchasing a home in the Detroit and the Metro area has been a difficult situation for many over the last few years, but not due to any credit or income related problems. Rather, financing has been hard to gain for Detroit homes as the area is facing a city-wide complication referred to as an “appraisal gap.”
An appraisal gap is, simply put, a difference in the sale price of the home versus the appraisal price of the home. As many sellers owe more on their homes than they are currently worth, securing financing for properties in the area has become virtually impossible. For those unable to sell, high payments have led to rise in foreclosures. This, in turn, lowers values of homes in the immediate area and creates a catch-22 situation.
Just as the market was looking grim for Detroit buyers and sellers, a new program was recently introduced to save the day.
The Detroit Home Mortgage Program was created as a collaborative effort between Detroit Mayor Mike Duggan, the Obama Administration’s Detroit Federal Working Group, local banks, foundations, and nonprofits. It was created in an attempt to make the home-buying process in Detroit a little easier, and a lot more realistic.
This program will allow for buyers to receive one mortgage financing the appraised value of the home—minus their down payment—and a secondary mortgage that will cover up to $75,000 to cover the gap between the appraised value and the sale price of the home or the additional cost required for renovations. The goal is to increase home ownership, property values, and reinvestment in the Detroit Metro area.
The primary loan covering the appraised value of the home is granted by the bank the individual approaches for the financing. The secondary loan, the one covering the appraisal gap, is granted by the Detroit Mortgage Program and will be pulled from a reserved pool of $40 million. This pool is created from donations from the five participating banks and several other charitable organizations. Each of the five banks—Huntington Bank, Flagstar Bank, Talmer Bank and Trust, FirstMerit Bank, and Liberty Bank—each donated a staggering $28 million, with Ford Foundation, the Kresge Foundation, and the Michigan State Housing Development Authority making up the remainder.
The program seeks to grant 1,000 mortgages with this funding.
By allowing buyers with decent credit ratings and sound income to begin purchasing homes in the area once again, despite the appraisal gap, the program hopes to reverse the catch-22 situation which had been haunting the Detroit real estate market. As homes begin to be purchased and renovated, it will boost the market value rates, occupancy rates, and show a positive increase in transactions across the board. This in turn will increase property values throughout these neighborhoods.