The 20% down payment myth is driven by the fact that borrowers must pay PMI when obtaining a conventional loan with less than 20% down. Many home buyers want to avoid the added monthly PMI cost. I personally think that PMI is an effective tool to help some people buy homes sooner. I recently had a friend refer his adult daughter to me. When I counseled her to make a 5% down payment and pay the monthly PMI, Dad challenged me. Here’s how I explained it to him.
His daughter wanted to buy a $200,000 house and had about $25,000 of savings. A 5% down payment was $10,000 and a 20% down payment was $40,000. Remember that a home buyer must pay closing costs and prepaid escrow at closing, in addition to the down payment. And I always recommend that buyers keep cash available in a bank account after closing, to provide a “reserve” should an emergency arise.
The $10,000 down payment left her with $15,000 for closing costs, prepaid escrow, and her “emergency fund.”
To avoid PMI, she would need to save another $25,000 or more for the 20% down payment. I asked Dad how long it would take her to save that and he said 5 to 10 years. I then told Dad that with Anna’s great credit score and 5% down payment, her PMI cost would be less than $60 per month.
She could stop paying rent and buy a house now in a rapidly appreciating home market. Paying PMI to buy now would enable her to build equity as home prices rise, rather than just continuing to save more and more to keep up with rising home prices while she rented and saved (not to mention that a $200,000 home today is no longer going to be a $200,000 home in the 5-10 year time frame it would take to save up 20%).
And current interest rates are near historic lows. There’s no way to predict now what future interest rates would be when she finally saved enough to pay 20% down.
When I explained the math, her dad agreed and she bought a home with a 5% down payment.
Note that PMI premiums are calculated based on the down payment amount and the borrower’s credit score. In general, the lower the down payment, the higher the PMI premium. And in general, the lower the borrower’s credit score, the higher the PMI premium. So not everyone will have such a clear choice as Anna did. But for borrowers with good to great credit scores, my opinion is that paying mortgage insurance is often better for building wealth than paying rent and waiting to save the full 20%.
Do you know someone in Georgia who fears they are “missing out” as they rent while home values rise rapidly? If yes, please connect them with me. I’ll work to help them buy sooner with a mortgage that best fits their need, with as small of a down payment as possible.
I know I posted this information about a year ago, but I hear this myth so often in the mortgage market, I will keep repeating this…..You do NOT need 20% down to buy a home!
According to recent National Association of REALTORS data, the average down payment made by recent home buyers is 12%. Younger buyers tend to put down less. Buyers between age 22 and 30 made an average 6% down payment. Recent home buyers between age 31 and 40 made an average 10% down payment. This ultimately follows common sense, as younger buyers have had less time in the work force to save for a down payment.
Veterans using VA mortgage financing can obtain loans with a 0% down. FHA mortgages have a 3.5% down payment requirement. And borrowers can obtain conventional mortgages with only 3% down.
The 20% down myth is driven by the fact that borrowers must pay PMI when obtaining a conventional loan with less than 20% down. Many home buyers want to avoid the added PMI cost in their monthly payment. But I personally think that PMI is an effective tool to help people buy homes and build wealth sooner. I recently had a friend refer his adult daughter to me. When I counseled her to make a 5% down payment and pay the monthly PMI, Dad challenged me. He did not want her to pay PMI. In my next blog post, I’ll explain my PMI response to Dad. Spoiler alert….the daughter did by a house with 5% down and paying PMI – it made very good financial sense.
Do you know a friend or family member who wants to buy a home in Georgia? Don’t let them by discouraged by the 20% down myth. Tell them that is only a myth and then connect them with me. It is very possible that I can help them finance a home purchase sooner, instead of waiting to save more money. We will work to make their home ownership dreams a reality – hopefully right now.
Multiple clients have recently asked me if the currently hot housing market will lead to a housing bubble that “pops” like in 2008. I first tell them that if I could accurately predict the future, I would be sitting on a tropical beach, not working. Then we discuss market fundamentals. I found this recent article from Zillow comparing the current housing market to 2008. It provides MUCH more detail than you’ll find in in this blog post. I think reading the detail is a great time investment for homeowners and home buyers.
With my degree in economics, I tend to view everything in terms of supply vs. demand fundamentals. And this article explains why the fundamentals are different now:
Housing Demand: Several sustainable factors are driving housing demand higher now, in contrast to more artificial demand drivers that led to the 2008 bubble.
The massive Millennial generation is now entering the prime home-buying age. Tens of millions of Americans are approaching their early thirties – the median age for first time home buyers. An estimated 46 million Americans will reach age 34 in the next decade. This demographic fact will cause “built-in” home demand even if other economic factors change.
The “Great Reshuffling” is in its early stages. 95% of experts surveyed believe that working from home at least part-time will continue as the coronavirus fades. Millions of renters living in high-cost areas could afford to buy a home in less-expensive areas, thus taking advantage of increased teleworking opportunities. More companies are making flexible work arrangements permanent, so this could further fuel home buying demand in lower cost communities.
Housing Supply: The current supply of homes for sale is very limited relative to the demand. The mismatch of supply and demand is driving home prices up at a rapid pace. There were less than 1 million homes listed for sale nationwide in March. This is the 18th straight month of annual declines. The number of homes listed for sale in March was down 32% from March 2020! So what is causing the supply problem?
In the years after the Great Recession, the number of homes built was significantly less than the number needed to keep pace with population growth. Many home builders have sought to avoid risk by limiting construction due to memories of unsold homes and bank foreclosures. The supply of vacant homes is now at its lowest level since 1957 – over 60 years ago.
And, due to the pandemic, many potential home sellers decided not to move. Some were concerned that they would quickly sell their home but not be able to secure a new home, so they elected not to sell.
When you combine the demographics driving demand with these housing supply limitations, this article concludes that the 2021 housing market will not implode as did the 2008 market.
Keep in mind that one real estate fundamental is “location, location, location.” It is possible that certain specific markets may see a housing downturn. For example, the ability to work remotely may mean that people leave certain high-cost cities since they need not worry about commutes. This could drive home prices down somewhat in these specific areas. But I believe these fundamentals apply to the housing market nationally.
Are you (or do you know) a Millennial who wants to buy a home in today’s hyper-competitive market? If yes, call me. At Dunwoody Mortgage, we have tools to help our clients win the contract. I would love to help you buy your first (or not first) home, and we will make the process as easy as possible on you.
Unison’s March 21 homeownership survey gives interesting insight regarding how the pandemic has impacted Americans’ feelings about their homes. It covers many different aspects of American home ownership in 2021. Here are some points that I find most interesting.
The pandemic forced Americans to do everything from home, so homes became schools, offices, gyms, and more. Therefore, 64% of respondents stated their home is more important now than ever before. 91% of respondents stated that owning a home makes them feel more successful, stable and secure. Before covid, 58% of homeowners felt an emotional attachment to their homes. After the pandemic changed our lifestyles, 70% of owners now feel an emotional attachment to their homes. Millennials reported the highest level of emotional attachment to their homes.
90% of respondents view their home as an asset as opposed to a burden. However, 29% of owners had to take some sort of action to keep up with their mortgage payments due to pandemic impacts. To weather the storm, homeowners accessed retirement savings, delayed remodeling projects, rented out portions of their homes, and sought forbearance relief. The study noted that Millennials reported the greatest economic impacts from covid.
45% of homeowners are planning a 2021 home improvement project. 33% of mortgage-holders say they would tap their homes’ equity to finance a home improvement. That’s up from 21% before the pandemic. The most popular planned renovations are kitchen and bathroom remodels. Only 4% believe creating a dedicated home work space will most improve their home life.
Finally, 37% of Millennials stated that the pandemic has made them consider moving. The biggest drivers of the desire to move are (1) needing more space, (2) reducing living expenses, and (3) job location flexibility.
The study has a lot more detail than I can cover here. Check it out if you want to learn more.
From a mortgage perspective, interest rates are still close to historic lows. Now is still a great time to buy a new home or do a cash out refinance to fund a home improvement project. If you know someone in Georgia considering a move or a refinance, please refer them to me. The Dunwoody Mortgage team can help our buyers win purchase contracts and will make the mortgage process as simple as possible.
As the Mortgage Blog has stated many times recently, buying a home in metro Atlanta is now a very competitive endeavor. Home buyers seek every possible advantage to win. A recent Redfin report documented the effectiveness of certain strategies. Here’s a quick summary:
All cash offers increase the buyers’ odds of winning by 290%.
Waiving the financing contingency increases the buyers odds by 66%.
Using a price escalation clause has no significant impact.
Waiving the inspection contingency has no significant impact.
I must say that the last two surprised me. But let’s focus on the effective strategies. The impact of making a cash offer is obviously huge, but one key in this market is that now cash offers must match or exceed the list price, or the offer may not win.
What if you have the cash but would prefer to finance some of the purchase? You have two options. I’m currently working with a client who made an all cash offer. After winning the contract, he applied for a relatively small mortgage. He could pay all cash, but he’s using the mortgage to keep some money invested in the stock market. With this strategy, we can close on time and it doesn’t concern the seller. But the buyer has no financing contingency or appraisal contingency protections. If the appraisal is low or underwriting denies the loan, the buyer must still close using his cash or will most likely lose his earnest money.
Another strategy for a cash rich buyer is to close the purchase with cash and then immediately do a home loan after closing. We call this a “delayed financing loan.” This gives the buyer the advantages of a cash offer and the ability to finance the home later and recoup some of the assets used for the purchase. Note that all of the assets used for the purchase must be from the buyer’s own accounts. The buyer cannot borrow money from a relative or anywhere else. If any of the funds for the cash purchase (even only $1,000) are from an account not owned by the buyer, then this quick finance option is not available. If not all the funds came from the buyer, then the buyer must wait 6 months after closing the purchase to do a refinance loan. And note that interest rate pricing on the delayed financing loan differs from the first approach described above.
Waiving the financing contingency is an effective tool for buyers who don’t have the cash to purchase without a mortgage. But it can be a risky strategy if the buyer has not addressed financing first. At Dunwoody Mortgage, we can underwrite loans with a “to be determined” property. Once approved, the buyer can confidently waive the financing contingency and offer a relatively short closing date. This is a great way to strengthen your offer versus your competition. Not every mortgage lender can offer TBD underwriting.
Are you buying a home in Georgia and want to win the bidding war? Call me about one of these options today. I’ll work with you to help you win the contract and close on your new home as soon as possible. (And for good measure, here are a few more creative Realtor ideas for winning the contract. I can help you with #4!)
As we have mentioned in multiple recent Mortgage Blog posts, it is a VERY competitive market for Atlanta home buyers. I’ve heard a 15-year veteran of the mortgage business say, “I’ve never seen it like this.” I have a Realtor friend who listed a home on a Friday in late January. By the following Monday she had received 106 offers.
A recent Wall Street Journalarticle covered some painful mistakes that home buyers have made in their zeal to win the contract. It’s a fascinating review of decisions some buyers wound up regretting in this uber competitive market. The article noted that “pandemic buying fever” has sometimes led to buyer’s remorse. A key point for home buyers to consider is that a house, “unlike expensive jewelry or clothing, can’t be returned if the buyer is unhappy with it, so a cardinal rule of home buying is that you shouldn’t rush into a purchase.” Critical home buyer mistakes included:
Waiving home inspections that could have identified unacceptable or expensive problems like woodpeckers and wasps.
Accepting home “issues” that one would not accept in a more “normal” market – the article’s example was toxic black mold and asbestos.
I have recently seen home buyers risk their earnest money with zero-day financing or appraisal contingencies. In my opinion, a zero-day financing contingency can make sense when underwriting has already approved the buyer (see the blog post mentioned below), and a zero-day appraisal contingency can make sense when the borrower is making a large down payment. But these approaches do have risk and the home buyer should thoroughly understand the situation before taking these (calculated) risks.
My recommendation is this…plan ahead and think carefully about what you are willing to risk in this market. Then make offers that are as aggressive as possible, given your risk tolerance. Perhaps you are willing to offer a zero-day due diligence period with a $5,000 earnest money payment. In that case, you may still want to pay for a home inspection to protect your long-term interests. If the inspection identifies an expensive structural issue, it may make sense to terminate the contract and forfeit the earnest money rather than close on a house that will require tens of thousands in repairs. Perhaps you have available cash, and you are willing to risk having to make a larger down payment than you originally planned, in which case you may consider a zero-day appraisal contingency.
One of our recent posts described a smart way for buyers to claim a competitive advantage in this market. I’ve used this approach with several buyers in recent months and it has worked well. In one case, one of my clients beat a cash offer!! If you want to compete more effectively in this home market without taking more risk than you can accept, call me and we can discuss a “TBD property underwrite.” I would love to help you succeed and win, even in this challenging market.
My colleague recently covered 2021 projections for the housing market. Those projections forecast a strong year for housing. We see evidence of this with home values continuing to rise.
CoreLogic reported home prices surged over 8% year over year in November. They also increased a little in October, and this trend is expected to continue.
We are seeing this everywhere in the metro Atlanta market. Homes are going under contract within a couple of days of being listed, over asking price, and often with buyers waiving some (or all) contingencies.
Sadly, the availability of for-sale homes has dwindled as demand increases and coronavirus outbreaks continue across the country, which is delaying some sellers from putting their homes on the market.
It is still a seller’s market, and will be for some time now. In this situation, I can’t emphasize some of these points enough for potential buyers.
How does one set themselves apart in this market?
Work with a loan officer (like me) who can get you pre-underwritten. This way your offer can say the loan is approved pending the appraisal and clear title. This sets the offer apart from almost all offers out there.
Work with a loan officer (again, like me!) who will talk with the listing agent to let them know how smooth of a closing to expect.
Do everything in your power to make a non-contingent offer.
Want to know more about some of those items mentioned above for your home purchase? If the home is in the state of Georgia, contact me today. I can have you pre-approved for a home loan same day. I can get a pre-underwritten approval in just a couple of days. It can be that quick!
After a crazy 2020 with the pandemic plus related economic impacts, a Presidential election, followed by a year-end pandemic surge, it’s time to ponder what will 2021 bring us. To recap 2020, the housing market started strong, until Covid cases appeared in the US and control measures were implemented. At that point, mortgage application volume showed year over year declines for four consecutive weeks. The following five weeks showed year over year negative growth, but the numbers stabilized. After this two-month period, purchase mortgage applications went positive. And now we have experienced almost 30 straight weeks of purchase mortgage application growth on a year over year basis. The average year over year improvement has been over 20%.
Due to the laws of supply and demand, home prices have risen in this time period. But mortgage interest rates have consistently decreased, enabling more home buyers to qualify to purchase higher priced homes, thus continuing to fuel the higher demand. Ultimately 2020 mortgage origination volume has been at a level not seen since 2003.
The Mortgage Bankers Association (MBA) now predicts that 2021 purchase originations will hit $1.59 trillion. That would be a new record – the previous record was $1.51 trillion in 2005.
The chief economist for the National Association of Realtors (NAR) recently stated, “This year may be one of the best winters for sales activity.” NAR predicts that a continuing housing shortage will keep home prices elevated. The NAR predicts a continued strong economic recovery, assuming an effective rollout of the new vaccine.
Are you still renting? With historically low interest rates, now is a great time to buy. You can buy more house now for the same mortgage payment you would have made on a lower priced home a year ago. The biggest challenge is that this market is very competitive. To win the contract, you need every advantage you can get.
Choosing the right mortgage professional can help you win the contract. (Learn more here.) Do you want to take advantage of the current low rates and perhaps buy a nice yard for some fun social distancing? Or do you want to upgrade your home office? Then contact me. I will do everything a lender can do to help you win the contract so you can move into your new home soon.
For a self-employed person who wants to buy a home in 2021, now is the time to start planning. Mortgage underwriting for self-employed borrowers is very different than for W2 salary borrowers, and it’s all about what the borrower reports on tax returns. Before reviewing the steps a self-employed person should take now, let’s do a quick overview of mortgage underwriting for the self-employed.
First of all, what is a self-employed borrower? In the mortgage world, a borrower is self-employed if one owns 25% or more of the business. And even if paying oneself using a W2, if owning 25% or more of the business, the self-employed rules apply. No exceptions.
Secondly, underwriters calculate self-employed income using the net income reported on the borrower’s tax returns. We use the net, not the gross, because the net shows the amount of income left after the borrower runs the business. Only the income remaining after paying business expenses is truly available to pay the mortgage. In many cases, underwriters will calculate income based on a two-year average of reported net income. In some cases, underwriters will consider only the most recent year’s reported income. Discuss this with your loan officer.
So how should the self-employed prepare now for a 2021 home purchase:
Review current year P&L statements to understand the income situation.
Determine a reasonable budget for a home mortgage payment – based on the buyer’s home purchase criteria.
Work with a mortgage professional to determine what 2020 net income is needed to win underwriting approval of the payment. (Your lender may want to review prior year tax returns.)
Plan to report expense deductions that will allow for the needed net income.
Plan to have enough available cash to make the income tax payment.
In some cases, the self-employed buyer may want to explore other financing options. My current client started her business in October 2018. Her 2019 business return shows a loss, and 2020 is not complete, so she has not filed a return. But her business has grown rapidly and it is now profitable. She has also found the perfect house. We can obtain a mortgage using income calculated from the last 12 months of her business bank statements, which is strong. So we can help her buy that perfect house now, before she has two full years of positive tax returns. I can tell you that she is thrilled, as several other lenders have not been able to help her.
Are you self-employed and want to buy a house in 2021? Or do you know someone who fits this description? Connect with me now so we can plan for a successful underwriting experience in 2021. Waiting until after 2020 ends may be too late and your business expenses could hurt your home buying plans. It’s best to do some planning now.
A recent real estate article noted that since the pandemic began affecting the market, “43% of all homebuyers have faced competition in buying their homes.” It’s a sellers’ market, and that makes it challenging for home buyers.
Given the historically low interest rates, many people are looking to buy homes now. But the current supply of homes for sale is relatively low. In mid-July, the National Association of Realtors’ official listing site showed housing inventory down 32% compared to July 2019. Realtors report that potential home buyers are often getting very frustrated. Bidding wars frequently result over homes listed for sale.
Working with a good buyers agent can help a buyer compete. Here are some other suggestions to improve a buyer’s odds of winning a bidding war:
No strings attached – the “cleaner” the offer the better. A buyer should remove every contingency she can live without. It is best to avoid making an offer contingent on selling your current home. Making a contingent offer lessens its appeal.
Leverage your strength – If you do have to sell your current home before buying, negotiate a short-term rent back of your home after closing. This could give you time to close on your purchase without moving twice. Since it’s a seller’s market, use that to your advantage when negotiating your sale. (Other options, if you must sell your home, include obtaining a short term rental or living with relatives.)
Offer to take the house as is – be sure to get a home inspection, and feel free to cancel the deal if the inspection uncovers a major problem, but otherwise, resolve to deal with minor issues yourself, after closing on the purchase. Requiring the seller to resolve relatively minor issues can make your offer less competitive.
Add a personal touch – I’ve heard of potential buyers hand writing a letter to the seller and describing how the home is perfect for the buyer’s family. Even include a photo of your family. And don’t discuss potential changes you want to make to the house if the seller can hear. Your planned changes may turn them against you.
Speed is of the essence – some buyers want to close quickly. Offer to close as quickly as you can.
Choose a local lender who will help you – I always ask buyers’ agents if they want me to call the listing agent and explain how strong my buyer is. That could help sway the seller. If they don’t want me to call, I ask them to have the listing agent call me. I go to bat for my clients whenever I can. Also, I can obtain underwriting approval on my clients’ applications using a TBD property. The buyer is approved by underwriting before she makes an offer on a home. I then give the buyer a letter stating they are approved by underwriting. Note this – “approved,” not “pre-approved” or “prequalified,” but approved. I did this for clients in July. Their offer beat out an all cash offer, because they could proceed without a financing contingency. Obtaining UW approval before they made their offer very strong, allowing us to remove the financing contingency and close quickly.
Do you want to buy a home in Georgia and want to make the strongest offer possible? Give me a call and let’s start the process. I can get you approved before you make offers, putting you in the strongest possible position to win in this competitive market. And I will go to bat for you to help you win.
Clay Jeffreys is a Mortgage Consultant with Dunwoody Mortgage Services and a writer for “the Mortgage Blog.” If you would like to be a guest writer for "the Mortgage Blog" please contact Clay for details.
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