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.
I have great news for current homeowners, the S&P CoreLogic Case-Shiller index showed that US home values increased at a 13.2% annual rate on average. So homeowners continue building their wealth rapidly. This was up from 12.0% in February. The biggest winners are in Phoenix, San Diego, and Seattle, where home price rose at 20.0%, 19.1%, and 18.3% respectively. Homeowners in the Atlanta realized increases of 11.2% annualized. That ranks #17 out of the top 20 US metro areas.
While this news is great for current homeowners, it poses a challenge for homebuyers. With prices rising and the intense competition for available homes, it’s even more difficult for homebuyers to win a contract.
A Realtor recently explained to me that he now coaches his clients to make smaller down payments to keep more cash in reserve to cover potential appraisal shortfalls. Most houses Atlanta are now selling at prices higher than originally listed. But a high offer price, by itself, may not be attractive to sellers when mortgage financing is involved.
(Yes, I have used this cartoon recently, but I love the smiles on the sellers’ and their Realtor’s faces, so here it is again!!)
Here’s why, the mortgage LTV is calculated based on the lower of the contract purchase price or the appraised value. If a home appraises for lower than the contract price, the mortgage amount will be based on the LTV using the lower appraised value, not the contract price. An offer above the list price is not really convincing unless the buyer commits to cover any appraisal shortfall. And, in this rapidly appreciating market, it can be challenging for appraisal values to keep pace. The appraisers must look back in time to find comparable homes that have already closed. So appraisal values can lag market prices.
My Realtor friend has seen lower cash offers beat out higher financed offers when the financed offers did not include a commitment to cover an appraisal shortfall. So homebuyers with cash available to make larger (say 20%) down payments may want to plan to make 5% to 10% down payments and hold the remaining cash in reserve to cover a possible low appraisal.
This type of environment is VERY challenging for homebuyers who can only afford a small down payment. Buyers with only enough cash to make 5% (or less) down payments have little room to cover appraisal shortfalls. My recommendation is this, talk with parents, grandparents, and in-laws about their ability and willingness to make cash gifts in the event of a low appraisal. Blood relatives can give home buyers cash for closing. This can be a great way to help young adults with little available cash actually win in this environment.
Do you know someone who wants to buy a home in Georgia? Are they uptight thinking about this crazy market? Please refer them to me. I’ll work carefully with them and do everything a lender can do to help them win the contract.
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!)
A recent National Association of Realtors (NAR) economist blog noted that 24% of first-time home buyers obtained FHA financing in January, while 59% obtained conventional mortgage financing. This is very interesting as it contrasts the picture painted in my blog post from September 2019. That post noted that 75% of Millennial home buyers obtained FHA financing. While not all first-time home buyers are Millennials, the recent data still appears to be a significant change from only about 18 months ago.
FHA mortgages once attracted many first time home buyers with a 3.5% minimum down payment. But beginning in 2014, home buyers could obtain conventional loans with only a 3% down payment. FHA loans also appeal to home buyers with lower qualifying credit scores. Conventional interest rate pricing charges higher interest rates for lower credit scores. Because FHA pricing places less emphasis on the borrower’s credit score than conventional loans, FHA pricing was often more attractive to buyers with credit scores less than 700, especially when those buyers could only make a small down payment.
Note that “standard” conventional loans with a 3% down payment require the borrower to pay a higher interest rate and mortgage insurance premium as compared to 5% (or more) down conventional loans. But conventional mortgage giants Fannie Mae and Freddie Mac began offering special loan programs (called Home Ready and Home Possible, respectively) to home buyers whose annual income falls below a threshold (currently about $65,000 in the Atlanta area) and with credit scores of 680+. With these programs, 3% down conventional loans become very competitive with FHA loans for buyers who qualify.
When a buyer qualifies for the Home Ready / Home Possible program discounts, they can save money in two ways as compared to FHA financing. First of all, conventional loans do not require up-front mortgage insurance. FHA loans require a 1.75% up front mortgage insurance premium that is typically rolled into the loan amount. Secondly, when the borrower’s equity reaches 20%, the conventional loan mortgage insurance can be cancelled, even when the borrower initially made only a 3% down payment. Borrowers who use FHA mortgages with less than a 10% down payment must pay monthly mortgage insurance premiums for as long as they own the mortgage. The monthly FHA insurance premium is 0.85 for all loans with less than 10% down payments. That is about $177 per month on at $250,000 mortgage. The fact that such a large insurance premium is permanent makes many buyers consider conventional loans more favorably.
Are you considering your first home purchase? Be sure to explore all the loan programs available to you, including conventional and FHA mortgages. Give me a call and I’ll help you compare your options to determine which will give you the lowest total payment, considering both the interest rate and the mortgage insurance components.
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.
Covid continues to cause interesting (and some perhaps fun) trends in housing.
A January 26 Wall Street Journalarticle covers a new covid-induced housing trend…Millennials seeking to escape covid risk in urban environments are feeling isolated and lonely, so they are moving to remote co-living spaces. In these residences, the tenants rent furnished rooms in big shared homes. Former vacation homes, country manors, farms, or converted hotels are now serving as these communal living spaces.
The trend began in Europe. One example is in a village outside of Berlin and is described as a “5-acre property, based in a converted manor, includes shared offices, a sauna, a swimming pond, a yoga studio and 20 rooms for guests who get three meals a day and pay less rent than for a Berlin apartment.” The article states that every room is leased.
This trend’s popularity is also growing in the US, as more large companies announce delayed returns to office work. A company called Outsite operates multiple US facilities in places like LA, Lake Tahoe, Santa Cruz, and Oahu. Outsite’s international locations include France, Portugal, and Barbados. The site in the Canary Islands really got my attention. Right now, weekly rentals there are listed at $300! I’m ready to go. Here’s a photo of the Canary Island location.
As vaccines continue to roll out and the world returns to a more “normal” situation, these trends may fade away. People will likely transition back to more traditional single family living situations.
If you work in Georgia and decide to follow this trend, you might eventually return. When you do, please contact me if you want to buy a house. Mortgage interest rates will likely stay near historically low levels for a while. (They may move up from the current rock-bottom levels, but I suspect they will still be low, from a historical perspective.) The Dunwoody Mortgage team makes home buying efficient and we help you every step of the way. We even have tools to help you win a contract in this most competitive buying environment. Let me know if you want to learn more. For now, just join me in dreaming of living and working in the Canary Islands for a month!
A recent mortgage industry headline surprised me, “Many Homeowners Still Missing Out.” The subheading read, “80% of owners have not refinanced.” Given that interest rates have reached historic lows, with less than 3.0% rates often available for 30 year mortgages, I’m really surprised that so many people have not refinanced.
The article provides the following statistics:
Almost 30% of mortgage holders do not know their current interest rate!!
Almost 20% of borrowers have refinanced in 2020.
Over 25% have considered refinancing but have not done it.
And over 50% have not even considered a refinance.
I am now doing refinances for customers whom I refinanced in 2019. Mortgage interest rates have continued dropping to the point that a second refinance now makes financial sense for some of my clients.
If you have a mortgage on a Georgia home, here are a couple of clues that you might want to talk with me about refinancing now:
Your interest rate is above 3.5%. The rate typically shows on your mortgage statement. Take a quick minute to look at it.
You obtained a FHA loan more than 2 years ago. With recent home appreciation, it’s worth exploring a conventional refinance in hopes that you can eliminate the FHA mortgage insurance.
The ultimate consideration is how much will the loan cost as compared to how much you can save monthly. Yesterday, I talked with a former purchase client. In 2016, she bought a house with a 3.5% down FHA loan at a 3.75% interest rate. That was a great deal for her….back then. Since she bought the house, it has appreciated over $100,000. With her increased equity, doing a refinance now would lower her interest rate almost a full percentage point, and she would eliminate the FHA mortgage insurance that costs her $155 every month. Her total monthly savings could be around $330. I estimate a refinance will pay for itself in just over a year.
What about you? Is your interest rate over 3.5%? Do you have a 2 year (or older) FHA loan? Do you want to give yourself a raise by lowering your monthly mortgage payment? If yes, give me a call. I can easily help you analyze your current situation to see if a refinance makes sense for you. Don’t wait too long. Who knows when interest rates will start rising.
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.
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.