Urban Institute recently released a report entitled, “Barriers to Accessing Homeownership: Down Payment, Credit, and Affordability,” which revealed that,
“Consumers often think they need to put more money down to purchase a home than is actually required. In a 2017 survey, 68% of renters cited saving for a down payment as an obstacle to homeownership. Thirty-nine percent of renters believe that more than 20% is needed for a down payment and many renters are unaware of low–down payment programs.”
Myth #1: “I Need a 20% Down Payment”Buyers often overestimate the down payment funds needed to qualify for a home loan. According to the same report:
“Most potential homebuyers are largely unaware that there are low-down payment and no-down payment assistance programs available at the local, state, and federal levels to help eligible borrowers secure an affordable down payment.”These numbers do not differ much between non-owners and homeowners. For example, “30% of homeowners and 39% of renters believe that you need more than 20 percent for a down payment.” While many believe that they need at least 20% down to buy their dream homes, they do not realize that there are programs available which allow them to put down as little as 3%. Many renters may actually be able to enter the housing market sooner than they ever imagined with programs that have emerged allowing less cash out of pocket.
Myth #2: “I Need a 780 FICO® Score or Higher to Buy”Similar to the down payment, many either don’t know or are misinformed about what FICO® score is necessary to qualify. Many Americans believe a ‘good’ credit score is 780 or higher. To help debunk this myth, let’s take a look at Ellie Mae’s latest Origination Insight Report, which focuses on recently closed (approved) loans. As you can see in the chart above, 51.7% of approved mortgages had a credit score of 600-749.
Bottom LineWhether buying your first home or moving up to your dream home, knowing your options will make the mortgage process easier. Your dream home may already be within your reach. To know for sure, give me a call!
Some Highlights:Many potential homebuyers believe that they need a 20% down payment and a 780 FICO® score to qualify to buy a home which stops many of them from even trying! Here are some facts:
- 72% of buyers who purchased homes this year have put down less than 20%.
- 76.4% of loan applications were approved last month.
- The average credit score of approved loans was 727 in September.
Lately, there have been many headlines circulating about whether or not there is an “affordability issue forming in the housing market.” If you are considering selling your current house and moving up to the home of your dreams, but are unsure whether or not to believe what you’re seeing in the news, let’s look at the results of the latest Housing Affordability Report from the National Association of Realtors (NAR). According to NAR:
“A value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that a family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment.”
- The national index results for August came in at 141.2.
- This is up from 138.9 in July, but down 8.3% from last August’s value of 153.9.
Bottom LineIf you are thinking of selling your home, let’s get together to discuss the affordability conditions in your town.
There are many unsubstantiated theories about what is happening with home prices. From those who are worried that prices are falling (data shows this is untrue), to those who are concerned that prices are again approaching boom peaks because of “irrational exuberance” (this is also untrue as prices are not at peak levels when they are adjusted for inflation), there seems to be no shortage of opinion. However, the increase in prices is easily explained by the theory of supply & demand. Whenever there is a limited supply of an item that is in high demand, prices increase. It is that simple. In real estate, it takes a six-month supply of existing salable inventory to maintain pricing stability. In most housing markets, anything less than six months will cause home values to appreciate and anything greater than seven months will cause prices to depreciate (see chart below). According to the Existing Home Sales Report from the National Association of Realtors (NAR), the monthly inventory of homes for sale has been below six months for the last five years (see chart below).
Bottom LineIf buyer demand continues to outpace the current supply of existing homes for sale, prices will continue to appreciate. Nothing nefarious is taking place. It is simply the theory of supply & demand working as it should.
In many markets across the country, the number of buyers searching for their dream homes outnumbers the number of homes for sale. This has led to a competitive marketplace where buyers often need to stand out. One way to show you are serious about buying your dream home is to get pre-qualified or pre-approved for a mortgage before starting your search. Even if you are in a market that is not as competitive, understanding your budget will give you the confidence of knowing if your dream home is within your reach. Freddie Mac lays out the advantages of pre-approval in the ‘My Home’ section of their website:
“It’s highly recommended that you work with your lender to get pre-approved before you begin house hunting. Pre-approval will tell you how much home you can afford and can help you move faster, and with greater confidence, in competitive markets.”One of the many advantages of working with a local real estate professional is that many have relationships with lenders who will be able to help you through this process. Once you have selected a lender, you will need to fill out their loan application and provide them with important information regarding “your credit, debt, work history, down payment and residential history.” Freddie Mac describes the ‘4 Cs’ that help determine the amount you will be qualified to borrow:
- Capacity: Your current and future ability to make your payments
- Capital or cash reserves: The money, savings, and investments you have that can be sold quickly for cash
- Collateral: The home, or type of home, that you would like to purchase
- Credit: Your history of paying bills and other debts on time
Bottom LineMany potential homebuyers overestimate the down payment and credit scores necessary to qualify for a mortgage today. If you are ready and willing to buy, you may be pleasantly surprised at your ability to do so. Ask me to recommend any number of mortgage professionals that will be happy to help you get started on your path to home ownership.
We have all seen the headlines that report that buying a home is less affordable today than it was at any other time in the last ten years, and those headlines are accurate. But, have you ever wondered why the headlines don’t say the last 25 years, the last 20 years, or even the last 11 years?
The reason is that homes were less affordable 25, 20, or even 11 years ago than they are today.Obviously, buying a home is more expensive now than during the ten years immediately following one of the worst housing crashes in American history. Over the past decade, the market was flooded with distressed properties (foreclosures and short sales) that were selling at 10-50% discounts. There were so many distressed properties that the prices of non-distressed properties in the same neighborhoods were lowered and mortgage rates were kept low to help the economy.
Low Prices + Low Mortgage Rates = High AffordabilityPrices have since recovered and mortgage rates have increased as the economy has gained strength. This has and will continue to impact housing affordability moving forward. However, let’s give affordability some historical context. The National Association of Realtors (NAR) issues their Affordability Index each month. According to NAR:
“The Monthly Housing Affordability Index measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent monthly price and income data.”NAR’s current index stands at 138.8. The index had been higher each of the last ten years, peaking at 197 in 2012 (the higher the index the more affordable houses are). But, the average index between 1990 and 2007 was just 123 and there were no years with an index above 133. That means that homes are more affordable today than at any time during the eighteen years between 1990 and 2007.
Bottom LineWith home prices continuing to appreciate and mortgage rates increasing, home affordability will likely continue to slide. However, this does not mean that buying a house is not an attainable goal in most markets as it is less expensive today than during the eighteen-year stretch immediately preceding the housing bubble and crash.
- According to a study by GOBankingRates, it is cheaper to buy a home than rent in 38 states across the country.
- In six states the difference between buying & renting would account for less than a $50 monthly difference, leaving the choice up to the individual family.
- Nationwide, it is now 26.3% cheaper to buy.
Should you incur PMI?Saving for a down payment is often the biggest hurdle for a first-time homebuyer as median incomes, rents, and home prices all vary depending on where you live. There is a common misconception among homebuyers that a 20% down payment is required, and it is this limiting belief that often adds months, and sometimes even years, to the home-buying process.
So, if you can purchase a home with less than a 20% down payment… why aren’t more people doing just that?One Possible Answer: Private Mortgage Insurance (PMI) Freddie Mac defines PMI as:
“An insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%. Once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your mortgage payment.”As the borrower, you pay the monthly premiums for the insurance policy, and the lender is the beneficiary. The monthly cost of your PMI depends on the home’s value, the amount of your down payment, and your credit score. Below is a table showing the difference in monthly mortgage payment for a $250,000 home with a 3% down payment and PMI vs. a 20% down payment without PMI: The first thing you see when looking at the table above is no doubt the added $320 a month that you would be spending on your monthly mortgage cost. The second thing that should stand out is that a 20% down payment is $50,000! If you are buying your first home, $50,000 is a large sum of money that takes discipline and sacrifice to save. Many first-time buyers save for 5-10 years before buying their homes. To save $50,000 in 10 years, you would need to save about $420 a month. On the other hand, if you save that same $420 a month, you could afford a 3% down payment in less than a year and a half. In a recent article by My Mortgage Insider, they explain what could happen in the market while you are waiting to save for a higher down payment:
“The time it takes to save a (larger) down payment could mean higher home prices and tougher qualifying down the road. For many buyers, it could prove much cheaper and quicker to opt for the 3% down mortgage immediately.”The article went on to say,
“Since renters typically devote a higher percentage of their income to housing than homeowners, providing flexible down payment options can help renters with solid earnings purchase a home – and gain a fixed-rate mortgage with principal and interest payments that will not increase over the life of the loan.”If the prospect of having to pay PMI is holding you back from buying a home today, Freddie Mac has this advice,
“It’s no doubt an added cost, but it’s enabling you to buy now and begin building equity versus waiting 5 to 10 years to build enough savings for a 20% down payment.”Based on results of the most recent Home Price Expectation Survey, a homeowner who purchased a $250,000 home in January would gain $50,000 in equity over the next five years based on home price appreciation alone (shown below).
Bottom LineIf you have questions about whether you should buy now or wait until you’ve saved a larger down payment, let’s get together to discuss our market’s conditions and help you make the best decision for you and your family.
Have you ever been flipping through the channels, only to find yourself glued to the couch in an HGTV binge session? We’ve all been there, watching entire seasons of “Love it or List it,” “Million Dollar Listing,” “House Hunters,” “Property Brothers,” and so many more all in one sitting. When you’re in the middle of your real estate themed show marathon, you might start to think that everything you see on TV must be how it works in real life, but you may need a reality check.