Is the property you want to buy, fix up, eventually rent out or use as a second home located in a "scarlet letter" Zip code or county?

If so, be prepared to get hit up for a bigger downpayment -- something you may not have counted on when you originally considered your purchase plan.

"Scarlet letter" refers to the growing number of local market areas now designated by major lenders and Fannie Mae as "soft" or "declining."

Under a policy that went into effect last month, mortgages on properties in any of hundreds of counties and Zip codes around the U.S. now require an extra 5 percent up front in equity investment.

For many leverage-conscious buyers and small investors, that sort of additional money out of pocket can be a deal killer -- or could send them back to the negotiating table to demand a lower price from the seller.

In late January, Countrywide Bank informed its national network of brokers that properties located in approximately 100 counties rated by Countrywide as higher-risk -- "Category 5's and 4's" on a five-level scale -- now require an extra 5 percent down up front.

Another 975 counties are rated Categories 1 through 3, and may require 5 percent bigger downpayments if a local appraiser rates the area as "declining," or if properties are taking more than six months on average to sell.

Among the areas immediately affected are dozens of prime rental and vacation areas in Florida -- Miami-Dade, Naples-Marco Island, Sarasota and Broward (Ft. Lauderdale.)

In Arizona, all the counties in the Phoenix-Scottsdale-Mesa area are rated highest risk. The same is the case for all of Las Vegas and Reno, Nevada.

Other large lenders have instituted similar systems-some using letter designations for elevated risk such as "C" and "D" -- and rating every Zip code in the U.S. One lender, giant GMAC-ResCap, even created a dedicated website allowing brokers to type in a Zip anywhere and get an immediate letter designation rating local risk, and requiring a 5 percent higher downpayment.

All of the designations were prompted by Fannie Mae, which mandated the 5 percent rule for all loan types. If you had figured on leveraging your property purchase with a 5 percent downpayment program, now you'll need to double that if the area has a high risk rating.

The upshot: Even if you're intentionally buying real estate in a soft market because prices have dropped and look attractive for the long term, you may have to pay a new penalty -- 5 percent more up front -- just to get into the game.

Published: February 8, 2008

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.