I’m receiving calls and questions all the time regarding mortgage qualification and home buying in today’s changing interest rate and price appreciation marketplace.
Your home buying power is the result of several variables – but there’s great news today when you consider increased income and historically low mortgage rates.
I’m linking today to an article by Amy Hale of The Mortgage Reports that really nails the answer. Go here for the entire article – and I’ve highlighted the key pieces below.
Are home prices really that high?
It might seem like home prices just keep rising, but according to the historical numbers, today’s housing is actually very affordable. “Real” home prices—those adjusted for income and interests rate changes—are currently 32.5 percent below their housing boom peak from 2006.
Home buyers still hold the power
According to the latest First American Real House Price Index, which aims to measure overall housing affordability by considering changes in income, interest rate and actual home prices, consumer home buying power is still strong.
“While unadjusted house prices have been on the rise since the end of 2011, nearly a seven-year run, consumer house-buying power has also increased by 14.3 percent over the same period,” said Mark Fleming, First American’s chief economist.
“House-buying power, how much one can buy based on changes in income and interest rates, has benefited from a decline in mortgage rates since 2011, and the more recent slow, but steady growth of household income.”
Buying power is actually up significantly from 2011 because real wages have actually increased over that time – household income has risen nearly 20% over the last 7 years. Also, mortgage lenders have relaxed some of the tight requirements and ratios for qualification. This combination makes it a great time for buyers and borrowers.
The real story on home prices
Overall, “real” home prices aren’t even close to their historical peak. In fact, according to Fleming, they’re currently 32.5 percent below July 2006’s prices and 9 percent lower than in January 2000.
Don’t let sticker prices fool you. American home buying power is still high. Want to get in on the market? Reach out to me for some answers, as it would be my privilege to help!
According to a new report, if you’re renting a house in hopes of saving money, you might want to re-think that strategy. Amy Yale at The Mortgage Reports shows that single-family rents are up significantly over the year –particularly on lower-end properties.
According to industry expert CoreLogic and their Single-Family Rent Index, rents on single-family properties are up 2.8 percent over the year.
On lower-priced properties (those with a rent lower than 75 percent of the regional median), rents have risen nearly 4 percent in the same period.
The Reason
Molly Boesel, CoreLogic’s principal economist, says growing demand for entry-level homes is the single largest factor:
“Single-family rent price growth remained solid in January,” Boesel said. “High demand and low supply for entry-level properties drove lower-priced rentals to have faster price growth than higher-priced rentals, revealing affordability pressures in this segment of the rental market.”
Hale also states that Phoenix showed over-4 percent gains in rent over the year.
The reason for these regional increases? Per Hale and CoreLogic, it’s strong economic growth, low levels of new construction, and increasing employment opportunities.
“Phoenix experienced 4.5 percent year-over-year rent growth in January 2018, driven by employment growth of 2.7 percent,” CoreLogic reported. This is compared with the national employment growth average of 1.4 percent, according to data from the United States Bureau of Labor Statistics.
This nationwide problem threatens to get worse before it gets better. Apartment builders are building more units, potentially creating supply that is beginning to crest. With that said, demand still exceeds the supply, especially for affordable housing.
Continuing The Trend
The relentless shortage of housing has lead to dramatic increases in rental rates – and the implications of high rent, and declining home ownership, could be profound over time.
“Almost all the housing demand in recent years has been filled by rental units,” says Sara Strochak, a research assistant with the Urban Institute. She also states that single-family rentals have gone up 30% within the last three years.
The trend began with large firms buying up cheap homes during the recession and turning them into cash-generating rentals—often rented by families who’d lost their own homes or who could no longer qualify for mortgages.
As is always the case with the supply and demand curve, high number of renters has caused rents to increase significantly – in many places, high enough for buying to become the better option.
The Solution
With rents continuing their upward climb, it might be time to consider buying or building a home.
One of the great underlying opportunities here is that buying a home can actually be cheaper than renting. Renters interested in reducing expenses and collecting tax benefits should absolutely talk to a mortgage lender prior to signing that rental contract.
Current market trends this summer really should encourage home ownership – find out more here….
Mortgage uunderwriting guidelines have been slowly loosening and those that were denied for a mortgage last year may qualify this year. There are also multiple down-payment assistance programs for borrowers with little to no down payment available.
Believe me, I understand that home inventories are tight across the country. And that is making home buying a bit challenging right now.
Nevertheless, I see a great opportunity in this market for first time buyers, investors, and existing homeowners who want to take advantage of rising equity.
Look at it this way….real wages are moving up, home equity is rising, and interest rates are keeping inflation at bay.
The Current Outlook
This is a recipe for a strong, long-term real estate market.
A decade ago, the housing market was the U.S. economy’s biggest weakness. Now, it offers crucial support.
The housing market has been trending on a path higher for some time now as it gradually recovered from the financial meltdown nearly a decade ago. Interestingly, it has even gained additional strength lately, despite broadly higher home prices.
This is due to the fact that owning a home right now is one of the better investments you can make.
Some analysts are saying that a rise in mortgage rates, prompted by higher Treasury yields and inflationary pressure, could eventually cut into demand for new homes.
The benchmark 30-year fixed mortgage hit nearly 5% at the end of April, its highest since early 2014, according to weekly data from Bankrate.com. As recently as September, it was right at 4%.
Still, the economy is much stronger than it was the last time rates spiked in 2013, which means the housing market has more ability to withstand higher mortgage rates than it used to, most analysts say.
As a matter of fact, real wages are up for the first time in 10 years, giving would-be buyers more purchasing power.
Couple that with expected equity increases in those home purchases, this looks to be a fantastic time to purchase.
The Data
Industry experts are also predicting an increase in purchases. Industry giant Zillow predicts that 2018 will shape up to be an even hotter real estate market than in 2017.
An analysis conducted by Zillow Research, a division of Zillow Group that operates the Zillow real estate marketplace, found that homes sold faster than ever in 2017 largely due to shrinking inventory.
Rising Rents Means It’s Time To Buy
The analysis has shown that rents have been increasing consistently the past three to four years. In the last year, for example, rents have over increased 4% nationwide.
That’s not necessarily a giant jump, but those increases year after year add up. If buyers can lock-in a monthly mortgage, that alone is a huge incentive to get into the home buying market.
Per Forbes Magazine: “according to an online survey of more than 1,000 active buyers conducted in early March by Toluna Research for realtor.com, 23% of millennials surveyed indicated that rising rent was a trigger for their home buying purchase.
Realtor.com reports that HUD data shows rents were up in 85 of the top 100 metro areas, including nine metros where rents were up by double-digit percentages from a year ago.”
More from Forbes: “These are the market dynamics and challenges Millennials face especially in urban areas where they naturally migrate.
Craig Furfine, clinical professor of finance at Kellogg School, Northwestern University thinks differently. ‘An alternative viewpoint is Millennials have been reluctant to enter the housing market having witnessed the effects of the housing collapse of a decade ago. Now they see interest rates rising and they think now may be a good time to buy’.
Interestingly, just like their baby boomer parents, many Millennials want that family home with a yard and in a good school system. It seems like the foundation of home ownership desire hasn’t really changed in a long time.
Don’t hesitate to reach out to me for more, as it would be my privilege to help!
Choosing the right loan type is an important part of home buying. There are many different mortgage options available, and each comes with its own set of benefits – including a zero down payment loan option.
Making a good decision about your down-payment is one of the key aspects getting the most value from your home purchase.
The amount you put down will play a large role in your monthly payments, your mortgage rate, and how much home you can qualify for.
For some buyers, making a large down payment makes sense. For others, there are options that require little or no down payment. There is no “good” or “bad” down payment amount. It depends on the buyer’s situation and long-term goals.
The Chenoa Fund provides first mortgages to any borrower meeting minimum credit standards. This is not a narrow, limited program for which only a select few borrowers can qualify. There is no first-time home-buyer, income or geographic restrictions or recapture provisions with this particular program.
Borrowers who qualify for a first mortgage may also receive assistance with their down payment.
Second Mortgages
Under FHA guidelines, Chenoa Fund is qualified to provide borrowers with grants or second mortgages to cover the borrower’s 3.5% minimum contribution (down-payment), with rates as low as 0% to help in qualifying.
Borrowers qualifying for an FHA first mortgage through Chenoa Fund can obtain a grant or second mortgage if they have at least a 640 credit score, a 43% debt-to-income ratio, and meet other qualification guidelines.
USDA loans could be the right choice for those who want a home in a suburban or rural area. Find out more here…
The United States Department of Agriculture (USDA) backs this loan in an effort to promote home-ownership and economic development in less-dense areas.
But don’t let the word “rural” concern you, as its definition is quite generous, per the USDA. Many suburban areas just outside of major metro centers are within USDA home loan boundaries.
USDA loans offer 100 percent financing, so the buyer doesn’t need to put any money down on their home if they don’t want to.
VA Loans
Another popular zero-down loan program is the VA loan. The U.S. Department of Veterans Affairs (VA) offers this loan program to active military members and veterans of the U.S. armed forces.
VA loans also carry the lowest mortgage rates of any loan type, typically around 0.25% below rates for conventional loans – and no mortgage insurance is required!
Also, a VA loan can be extraordinarily flexible. Lenders allow credit scores down to 620 or lower thanks to strong government backing and the VA utilizes a different debt-to-income calculation. VA loans were created to make home-ownership accessible and affordable for military members and veterans.
Options Between 3% and 5% Down
3% Down Conventional
Fannie Mae and Freddie Mac both have low down-payment options where the home-buyer needs only 3% down, making the loan-to-value (LTV) ratio 97. This mortgage option generally requires a credit score of at least 620.
This loan requires private mortgage insurance, but depending on your credit score, the mortgage insurance could be less expensive than that of FHA.
Those looking to keep the home and loan long term might opt for this loan; mortgage insurance automatically drops off when you build 22% equity in the home. FHA mortgage insurance remains for the life of the loan. Also, homeowners must refinance to cancel FHA mortgage insurance.
Because conventional PMI can be cancelled, buyers often opt for it, even when it is more expensive than FHA mortgage insurance.
3.5% Down FHA Loan
One of the most popular low down-payment options is the FHA loan. These mortgages are backed by the Federal Housing Administration (FHA) and require a credit score of just 580 and a down-payment as little as 3.5%.
FHA loans require a monthly mortgage insurance premium (MIP) payment. This is FHA’s “brand” of mortgage insurance and serves the same purpose as private mortgage insurance (PMI) on conventional loans. While mortgage insurance of any type means extra cost, it also means the buyer can put less money down and buy a home sooner.
Low down-payments are not the only reason FHA loans are popular. Because of their lenient credit requirements, debt-to-income ratios, and low down-payment, many home buyers will find that an FHA loan works best for them.
One of the fantastic benefits of this program is that it allows the seller to contribute money toward the buyer’s closing costs. These are called “concessions” and they used to attract buyers and offers, making their property more attractive for purchases.
Under current HUD guidelines, sellers can pay money toward a homebuyer’s closing costs, when an FHA loan is being used. These seller contributions are typically limited to 6% of the purchase price.
You might wonder why any buyer would ask a home seller to pay a closing cost credit for the buyer. The first thought that crosses a seller’s mind is “doesn’t the buyer have any money?” – and if the buyer doesn’t have any money, “why should the seller subsidize the buyer’s home purchase?”
However, it is common for sellers to pay a closing cost credit for some buyers in certain situations.
Here’s a brief look at the rules and requirements when a seller pays for some of or all of the buyer’s closing costs…
Seller Concessions and FHA Loans
Because this is a federal program, the US Department of Housing and Urban Development (HUD) sets the rules for seller contributions toward closing costs for FHA loans. It is their Single Family Housing Policy Handbook (HUD Handbook 4000.1) that outlines the regulations for the FHA loan program.
Their handbook further states that “interested parties” (seller, builders, etc.) can contribute money “toward the Borrower’s origination fees, other closing costs and discount points.” These contributions are generally limited to 6% of the sales price.
Believe it or not, seller contributions that exceed 6% do not happen very often. In most cases, these contributions fall at or below the 6% cap.
How Does It Work?
The number one way many buyers get the sellers to pay a closing cost credit is by increasing the sales price to cover the additional expense. For example, let’s say the sales price is $200,000, and the buyers need 3 percent of the purchase price. If you were to divide the sales price by .965 (a 3.5% down payment), that would equal $207,254. If you take $207,245 X 3.5% and deduct it from the sales price, the seller is still netting that same $200,000.
The drawback to this approach is what happens if the home does not appraise by the buyer’s lender at $207,245? If there is no provision for this in the purchase contract, the seller could be stuck paying a credit from a lower sales price and netting much less than the seller anticipated.
The Down Payment Portion
Homebuyers who use an FHA loan to buy a house must make a down payment of at least 3.5% of the purchase price or appraised value.
The FHA handbook states that “Interested Party Contributions may not be used for the Borrower’s [down payment].”
This means that the seller cannot contribute money to the home buyer’s down payment, when an FHA is used to finance the purchase.
It’s the responsibility of the buyer to produce the entire down payment.
Offer a Trade Off for a Closing Cost Credit
Sellers will often agree to pay a closing cost credit if they get everything they want. Sellers want qualified buyers who will close escrow and not cause any problems during the escrow period.
In other words, offer to buy the home in its AS IS condition and assure the seller the buyer will take care of any home inspection issues after closing.
Too many sellers, it is worth it to give a little discount on the price upfront in return for assurance the escrow will close on time without hassles. Some sellers work a little flexibility into the sales price to begin with, so it’s not a hardship to offer a closing cost credit.
In Conclusion
It’s important to distinguish that HUD allows home sellers to contribute toward the buyer’s FHA closing costs — but they do not require it. Seller concessions and contributions are typically agreed upon during the negotiation process, prior to closing.
Generally speaking, sellers tend to be more willing to pay buyer closing costs in a slower real estate market, and less inclined to do so in a hot market with competing offers.
In fact, in a sluggish market you’ll often see real estate yard signs that say things like “seller pays closing costs.” This is an enticement to attract more offers, which might be necessary in a buyer’s market.
In an active and highly competitive housing market, however, this kind of offer is less common. That doesn’t mean buyers can’t ask for the seller to pay some or all of their closing costs. It just means that the current state of the market will affect their willingness to do so. So when it doubt, rely on your real estate agent’s advice.
Thomas Eugene Bonetto
Mortgage Loan Originator
NMLS: 1431961
About The Coach
Tom Bonetto has been helping his customers and players achieve their best for nearly 30 years. His goal is to provide both a superior customer experience and tremendous value for both his business associates and his players alike.
