Category Archives: Buyer Information

It’s Time for Homebuyers to Catch a Break

Buyer Information, Market Update

Buyers who have been discouraged about purchasing a home because the housing market is too competitive, will like the latest 2022 forecast update from Realtor.com.

Inflation, higher home prices and higher mortgage rates are impacting affordability, which has caused many homebuyers to stop looking. In April 2022, existing home sales dropped 2.4% from March, and 5.9% year-over-year, partly due to mortgage interest rates crossing 5% for the first time in decades. Meanwhile, home prices in April rose 14.8%.

Many sellers are putting homes on the market in an effort to cash in before prices possibly begin to fall. Active listings, or homes listed for sale, are anticipated to grow 15% year-over-year in the second half of 2022. Home builders have stepped up production by about 5%, so buyers will have more inventory to choose from. Home sellers will have to become more competitive which will invite wait-and-see homebuyers back into the market. Housing sales volume for 2022 should be the second-highest in 15 years, even though a decline of 6.7% from 2021 is anticipated.

With unemployment rate near 50-year lows, wage growth should rise 3.8%, and flexibility to work remotely, even out of state, will continue. First quarter data showed that 40.5% of Realtor.com® home shoppers viewed listings located outside of their current state, up from 33.4% in 2020.

That said, affordability will remain an issue for many homebuyers as home sales prices rise 6.6% and mortgage rates reach 5.5% by the end of the year.

Market  View – September 1, 2022
• 714 currently listed homes for sale in the five county greater Lansing area.
• 296 homes with accepted offers. Awaiting inspections and/or appraisal.
• 487 homes listed as Pending. Have completed inspections and will soon close.
• 4553 homes that have closed since January 1, 2022.
• 7241 homes that have closed in the past 12 months.

Mortgage interest rates
30 year fixed – 5.55% ($5.45 per $1000)
15 year fixed – 4.85% ($7.59 per $1000)

 

About Earnest Money Deposits

Buyer Information, Seller Information

When a buyer and seller agree on a purchase price and terms, the buyer7856255.large shows the seller a sign of good faith in the form of earnest money. This money, typically 1% to 3% of the sales price or whatever is customary for the local market, is deposited with an escrow agent or title company, a neutral third-party that serves to finalize the transaction for both sides.

Earnest money is designed to protect the seller. It shows the buyer is serious, but if the buyer doesn’t follow through with the contract, the seller could lose valuable marketing time when the transaction doesn’t close. They’ll have to start all over again to market the home. There are also opportunity costs – the seller could have possibly sold the home to a different buyer and perhaps for better terms. For that reason, the seller can keep the earnest money.

This also protects the buyer. The buyer can get out of a sales contract and get their money back if contingencies outlined in the purchase agreement aren’t met. Typical contingencies are that the buyer’s lender agrees to make the loan, the appraisal meets or exceeds the sales price of the home, the home passes inspection or that the buyer sells their current home before closing on the seller’s home.

Earnest money paid upfront in the transaction means the buyer has to come up with less money at closing or the deposit can be used as part or all of the down-payment.

Late Payments and Credit Scores

Buyer Information, Finance and Taxes

creditscore.largeConsumers who make late credit payments have no idea how badly their credit scores can be affected or how long it takes to repair the damage.  According to Nerdwallet.com, a late payment of 30 days or more can knock as many as 100 points off your credit score and stay on your credit report for up to seven and a half years.

FICO scores, the credit-scoring system used by the Fair Isaac Corporation, help banks and other lenders determine a borrower’s creditworthiness. Your scores can change with every new report from a creditor, but nothing impacts credit scores like a missed payment. Your payment history accounts for 35 percent of your FICO score, advises credit bureau Experian.com. Other factors include the amounts owed (30%) credit history length (15%), types of credit (10%) and new credit (10%.)

If you’re late making a payment on an account, don’t despair. Equifax.com, another credit bureau, explains that the payment due date on your statement or bill is the last day you can pay on your account without incurring late fees. Lenders routinely report accounts to credit bureaus at least 30 days after the payment due date, and they often don’t report late payments until they’re 60 days past due.

Even if your payment is late, go ahead and make it. If you can pay the amount due in full, some lenders won’t report the late payment. You’ll have to pay whatever late fees are levied, but your credit score will remain intact.

How Much Do You Really Need for a Down Payment on a Home?

Buyer Information

Home Mortgage Down Payment, A gray house, brown card and calculaIn years past, lenders have always pushed that a 20% down payment was absolutely necessary in order to purchase home. Fortunately, this idea is a myth. The average first–time home buyer puts just 6% down, and certain loan programs allow as little as 3% or even zero down.

How much down payment you need for a house depends on which type of mortgage you get. A conventional loan is the most sought after loan option, and the down payment requirement starts anywhere from 3% to 5% down. On a $250,000 house, that’s a $7,500–$12,500 down payment. However, in order to avoid private mortgage insurance (PMI), you need at lease 20% down on a conventional mortgage – which increases your monthly mortgage payment.

Depending on the mortgage program for which you’re applying, there’s going to be a specified minimum down payment amount. For today’s most widely–used mortgage programs, down payment requirements are:

  • Conventional Loan (with PMI): 3% minimum
  • Conventional Loan (without PMI): 20% minimum
  • FHA Loans are guaranteed by the Federal Housing Administration and require as little as 3.5% down
  • VA Loans are backed by the Department of Veterans Affairs and have no down payment requirements. VA loans are designed for active military, veterans, and some surviving spouses
  • USDA Loans are guaranteed by the U.S. Department of Agriculture and require nothing down. However, USDA loans are devised for home buyers in suburban and rural areas who meet income limits and other eligibility criteria
  • Fannie Mae HomeReady Loan: 3% down minimum
  • Freddie Mac Home Possible: 3% down minimum
  • Jumbo Loan: typically 10% down, depending on lender

In the end, a 20% down payment isn’t always necessary. If you want to purchase a home this year, reach out to a trusted real estate agent to start the conversation and explore your down payment options.

Comparing Interest Rates…Check the APR

Buyer Information

Most buyers are shopping for the best mortgage loan rate. However, many don’t think to add the “closing costs” expense into the total cost of the loan.

When applying for a mortgage, you may not pay the advertised rate. The best rates are for those homebuyers with the best credit scores. However, lenders are competitive, so you’d be wise to compare the rates and closing costs of several lenders.  You’ll receive a loan estimate that you can compare side-by-side.

Compare the Interest Rate
There are many factors that affect interest rates, including the economy, inflation, and the Federal Reserve’s overnight borrowing rates for banks. You can’t control these things, but you can influence the factors influence your credit score.

If you have a credit score of 740 or higher, the risk of default is low enough that you will likely receive the lender’s best rate. A credit score of 620 or lower will give you fewer loan options and the highest rates. Lenders also look for a loan-to-value – code for how much money you’ll put down as a down payment. The more you put down the better the ratio.

What you’ll actually pay
The true rate you’ll pay is the annual percentage rate (APR). The APR is your mortgage interest rate plus closing costs that have been rolled into the loan.  These include loan origination fees, property appraisal, flood certification, credit reports, and other charges associated with getting a loan. You’ll be able to find these numbers under the “comparisons” section of your loan estimates.

There is no fixed amount for closing fees and they will vary from one lender to another. Basically, a low interest rate with higher closing costs may turn out to be a more expensive monthly payments than one with a higher interest rate and lower closing costs.

Make sure that you’re comparing loans that the APR is consistent. For example, if the average 30-year fixed mortgage rate is 3.030%, then the APR is 3.250%.

Are we headed for real estate crash?

Buyer Information, Finance and Taxes, Seller Information

Every fall, when the housing market begins the annual slowdown, buyers and sellers begin to ask if we are destined for another crash like the country experienced in 2007.

The housing market crash 15 years ago was responsible for a worldwide recession. Millions of families lost their homes and housing values plummeted more than 30%. It took nearly a decade for the Lansing market to fully recover from that disaster.  While it’s true that the real estate market is experiencing surging prices and a housing shortage much like market environment prior to 2007, the conditions are different than those 15 years ago.

Uncontrolled Mortgage Financing.
Following a period of high interest rates approaching 18%, mortgage money became available for a new low of 7%. The market quickly became flooded with new buyers hoping to  qualify for a mortgage loan. However, there was no agency regulating the business of mortgage financing. It was easy for just about anyone  to set themselves up as a mortgage broker and make a fortune offering loans to unsuspecting buyers who didn’t know they were not financially capable of sustaining monthly mortgage payments.

“If they have a pulse, we’ll give them a loan.”
This was the joke in the mortgage business. It was possible for a buyer to secure mortgage financing for much as $750,000 on “stated income” without proof of employment.  Millions purchased their home with no out-of-pocket expense. Adjustable-rate loans, with closing costs and down payment built into the monthly payment, made it easy for anyone to obtain a mortgage and become a homeowner.

These buyers often had a first and second mortgage and no equity in the home. Initially, the monthly payment was lower than renting, so it seemed like a good idea. However, the adjustable-rate eventually raised the monthly payment to more than many could afford.

Mortgage defaults rapidly increased nationwide with the investors who held those loans unable to sustain the financial loss. Ultimately, some of this country’s largest banks and mortgage companies went out of business.

Mortgage Practices have Changed.
These near fraudulent practices forced the United States Congress and federal regulators to change how mortgage lending is regulated. The Consumer Financial Protection Bureau was created to enforce standardized mortgage practice so that the process of obtaining a mortgage is more transparent. Lenders who do not follow prescribed practices will loose their license and suffer huge penalties.

Many economists are confident that there will eventually be a change in the market. Population movement, interest rates, and consumer confidence all contribute to a shift from “seller’s market” to “buyer’s market”…but not a crash.

 

Normal Real Estate Slowdown Entering September

Buyer Information, Current Lansing Area Sales Statistics, Seller Information

The current inventory of homes (770) is more than double the 353 homes available to buyers in April. This increase occurs at this time every year and does not indicate a change in the current seller’s market.

Historically low interest rates, currently at 2.87%, continue to offset the increased cost of purchasing a home with properly priced homes continuing to sell quickly, and with multiple offers.

Why the increased inventory?
Each spring the inventory includes a large number of properties that for a variety of reasons didn’t sell the previous year.  A home in poor condition or lacking a second bath may be passed over by buyers willing to wait until something better comes along. Obviously, an unappealing home is not going to easily sell as a growing number of more attractive homes become available.

Then there’s the reduced number of buyers.  As of August 30, 1,022 homes have accepted offers or are pending a closing.  Also, 5,255 homes have closed since the beginning of the year. This adds up to 6,277 buyers who are no longer searching for a home. Add to that figure the families involved with back-to-school activities who may need to postpone home shopping until next spring.

This is good news for September buyers still in the hunt.  Increased inventory plus reduced competition may provide an opportunity to acquire their home of choice.

 

The Five-year Equity Rule

Buyer Information, Finance and Taxes

7118744.largeWhen you buy a home, plan on staying there for approximately five years. Why? You’ll need equity in order to sell the home without losing money.

Equity is your percentage of ownership VS how much the bank owns. With any mortgage loan, the first few years of payments go more toward paying interest than reducing your principal. To build enough equity to sell at break-even or a profit, you’ll have to recoup closing costs and fees as high as 14% in some areas. To build equity over time, do the following:

Put more money down. If you put 20 percent down, you’re in good shape, but if you put down 3.5%, 5% or 10%, it will take longer to build equity, so be patient.

Pay your mortgage on time and in full. Paying principal builds equity. The more months you pay, the more equity you’ll build.

Make additional mortgage payments. You can add an extra $50, $100, or any amount per mortgage payment. This will also help you get rid of private mortgage insurance or allow you to refinance to a PMI-free loan once you reach 22% equity.

Let time and the housing market work for you. The housing market typically rises one to two percentage points above inflation annually, but if you’re lucky, your home may gain much more value than that.

Building equity takes time, money and luck, which is why following the five-year equity rule will help you plan when to sell your home.

Home Ownership as a Hedge Against Inflation

Buyer Information, Finance and Taxes

Home-EquityThe financial reasons for owning your own home are to build equity and take advantage of tax breaks that do not exist with other assets.  However, the greatest advantage is that owning a home is a terrific hedge against inflation.

Since the early 1900’s, the annual inflation rate in the U.S. has averaged 3.10%. As the cost of goods and services rises, so do the costs of buying a home.  Mortgage interest rates have recently risen slightly, but are still at record lows. If you purchase a home this spring, you will acquire a financial asset that promises to rise in value while you enjoy using it.

That means that while others pay rising rents and home prices increase year after year, your monthly payments become less expensive by comparison. This allows you the financial freedom to reinvest in your home or other worthy goals such as higher education and retirement.

A home can be your inflation hedge.  Once the pandemic is under control, the economy will improve to the point that the government needs to control inflation by raising borrowing rates to banks. When this happens, you can expect mortgage rates to rise, making the purchase of a home more expensive.

Are Sellers Required to Make Repairs

Buyer Information, Seller Information

Typically, buyers include a home inspection contingency in their purchase offer that allows them to ask the sellers for repairs and opt out of the contract if the seller refuses. The seller can respond in several ways.Picture1

  • They can readily agree to fix the problem, no matter how expensive.
  • They can agree to fix any problem that’s a safety or potential legal issues, such as mold or radon remediation, but decline minor repairs such as filling in and painting over picture hanger holes in the wall.
  • They can refuse to fix anything, but risk losing the buyer. For safety or code issues, they’ll have to declare the problem on subsequent seller’s disclosures, which could impact the home’s value to future buyers.
  • They can offer to lower the price of the home to cover the cost of the repair for the buyer or offer a closing credit to the buyer to pay for the repair without lowering the price of the home. That way the buyer can complete the repair to their liking.
  • They can ask the buyer to meet them halfway, such as paying more for the home if the seller repairs something major, or replaces the roof.
  • They can ask the buyer to waive additional repair requests if the seller will fix the worst or most expensive problem.

Sellers should know that FHA, VA and other government-guaranteed loans have stricter requirements for home safety and that some repairs are mandatory for the buyer’s loan to close.