It’s a cycle most realtors know well. As winter loosens its frigid grip, the real estate market sees something of an awakening, with more and more buyers on the hunt for homes as the weather warms. And these buyers should be prepared to face tough competition. Let’s look at how we can get them ready for the springtime frenzy.
Pre-Approval Offers a Competitive Edge
What level of competition will we see among home buyers this spring? Substantial. Nationally, the housing inventory has fallen to levels we haven’t seen in over twenty years, with the supply of homes that are on the market on a steady decline. We can look at historically low interest rates as a big reason; buyers have been hot to get in on great mortgage deals and homes have been selling in record times, often mere days after getting listed. But the home-supply forecast isn’t as dire as some may fear; conventional wisdom among economists is that 2022 will come to an end with more inventory than we had when the year began.
Some of this inventory dearth is attributed to the natural patterns of the real estate market. As most realtors know, things are often slow during wintertime, with fewer sellers listing fewer homes, and things usually begin to pick up at the end of February. While the demand for homes will still exceed supply in the foreseeable future, we should see a bump in listings this spring, albeit in a seller’s market in which homes get snapped up fast. However it works out, the buyer with a mortgage pre-approval letter in hand has a clear advantage.
Why begin with pre-approval?
Lots of folks, especially first-timers, take a “testing the waters” approach to buying a house; they simply look around to see what homes are available, figuring they’ll take care of the financial details when they know what home they want. It’s an approach that almost guarantees that some other buyer will snap up that home. Especially in today’s fast-moving market. These buyers likely need guidance on the main benefits of a pre-approved mortgage.
- Pre-approval sets a budget. While a pre-approval letter doesn’t guarantee the eventual loan amount, it is a close approximation of how much someone can borrow if one’s financial situation and interest rates don’t change in the near future. That loan amount, plus what a buyer may have for a down payment, sets the highest price that a buyer can pay for a home.
- Pre-approval flags potential issues. In the mortgage pre-approval process, lenders look at basic financial information and almost always pull credit reports. If there are credit problems, they’ll show up here. Giving the potential borrower time to resolve these issues before they set their eyes on their dream home.
- Pre-approval helps with mortgage choices. Should one get a conventional mortgage loan? Would a VA Loan, or an FHA Loan be better? While borrowers don’t need to choose their mortgage type during the pre-approval process, pre-approval does offer insight into which mortgage is best for which homebuyer.
Won’t interest rates rise this spring?
Almost certainly. Anyone who has been paying attention to the public signaling from the Federal Reserve knows that interest rates are expected to rise this year, and springtime is when we’ll likely see the change. It was bound to happen sometime; the unprecedented low interest rates of the recent past were never seen as permanent.
This impending rise has prompted speculation that homebuyers are less likely to seek out mortgages at these higher rates. So how high will rates go and will this increase serve as a hindrance for homebuyers? The consensus among experts is that we’ll see rates go up between half and one percentage point throughout 2022. Which still makes mortgages attractive for the majority of homebuyers.
Don’t Make the Mistakes of 2021
Almost anyone who was looking to buy a home last spring had to deal with serious competition. Record-low interest rates and low inventory were the kindling that ignited bidding wars. And about two-thirds of Americans who intended to purchase homes in 2021 were ultimately unsuccessful buyers. We can chalk some of that up to a pandemic, but others failed through some common missteps.
Competitive offers are key. While the highest bid does stand the best chance of landing the sale, the right competitive offer often needs more. Mortgage pre-approval shows a seller that the buyer can pay the asking price. Armed with a pre-approval letter, a buyer can more easily suggest an expeditious closing, letting the seller set the accelerated timeline. Offering to purchase a house as-is (after an inspection) also ups the competitiveness of an offer.
A significant number of unsuccessful homebuyers in 2021 lay the blame on their inability to not qualify for mortgages. But was this true in every case? Chances are many of these would-be homeowners wrongly assumed that lenders would deny them loans based on financial situations. While credit histories can’t be improved overnight, focusing on some fundamentals will improve the chances of getting approved for a mortgage. Paying bills on time, working to lower debt, and saving for a down payment makes loan approvals more feasible for many.
Just as snow melts, greenery blooms, and wildlife awaken from long slumbers, spring welcomes a seasonal rise in home sales. And City Lending will be right there to help ensure these springtime purchases go smoothly.
Saving enough money to make a down payment on a home is at times the most difficult task that would-be homeowners face, and one that often prevents people from getting their dream homes. Even putting away the bare minimum of 3% down can be an insurmountable obstacle for some. For many of these folks, an 80/20 piggyback loan may be the solution. Let’s look at how one can buy a home with zero money down with an 80/20 mortgage.
What exactly is an 80/20 mortgage?
When you use an 80/20 mortgage to buy a home with no money down, you’re making one purchase with two separate loans. The first loan goes toward 80% of a house’s selling price; the second, as you may have guessed, is used to cover the remaining 20% of the home’s cost. The first is a traditional mortgage loan, often with a 30-year term at a fixed interest rate. The second loan is usually either a 15-year home equity line of credit or a similar home equity loan, often with a variable interest rate.
When closing on an 80/20 mortgage, the buyer will finalize two distinct loans, and each month needs to make two separate mortgage payments. Does it all sound somewhat convoluted, and maybe even unnecessary? It’s not. Here’s why.
Why use a pair of loans to purchase a house?
Most borrowers look to 80/20 loans to get two benefits: no down payment and the avoidance of having to pay private mortgage insurance (PMI) each month. The tactic does something of an end-run around a more traditional mortgage in which private insurance is required if the homebuyer puts down less than 20% of the cost of the home. Normally, when little or no money is put down on a home, lenders want the security that PMI provides in the event that there’s a default. However, with an 80/20 mortgage loan, the 20% that would normally need to be put down is covered by its own mortgage, so PMI isn’t necessary.
Who qualifies for an 80/20 mortgage?
As 80/20 loans do carry some risk for the lender, borrowers often need to have higher credit scores than they would need for some other types of mortgage loans. Lenders generally want a credit score of at least 700 and like the borrower to have a low debt-to-income (DTI) ratio, 45% or below is usually preferred. Plus, potential borrowers will have better chances of getting approved for an 80/20 mortgage if they have solid employment records, steady residency histories, and a reasonable amount of savings in the bank. While no single one of these factors will be determinative of approval, these are the main things that lenders will probably consider.
What are some of the benefits of an 80/20 mortgage?
Flexibility is a big one. As the second loan for 20% will likely be a home equity line of credit, its use isn’t limited to just paying off the home. After you pay down a portion of that loan, the credit line can then be used for any number of purposes, including the popular choice of cash for home improvements. Then there are tax benefits to consider with an 80/20 mortgage, as interest on mortgage loans — including home equity loans — may be tax deductible.
Do 80/20 loans have any restrictions I should know about?
This varies from case to case and lender to lender. There can be a cap on the amount of the second loan that’s for 20%, perhaps a limit of $100,000. A common requirement set by lenders for 80/20 mortgages is that the borrower lives in the home, using it as their primary residence, so purchasing investment properties isn’t generally possible with the 80/20 route.
What are some costs to consider with 80/20 mortgages?
As you will be closing on two mortgages when you buy your home, you may have to pay the closing costs on each. Though some lenders overlap these costs when issuing 80/20 mortgages. While closing costs on home equity lines of credit (HELOC) are usually lower than those for primary mortgages, they are not insubstantial, usually between 2% and 5% of the loan’s amount. And bear in mind that if the second loan is at a variable rate, that rate has the potential to rise; the historically low interest rates of the recent past were always bound to increase.
VA Loans: Another Way to Buy With No Money Down
An 80/20 mortgage isn’t the only option for putting zero money down on a home. Backed by the U.S. Department of Veterans Affairs, VA loans don’t require a down payment because the government guarantees that the lender will recoup up to 25% of the loan’s amount in the event of default. These loans are available to active-duty members of the military, veterans, and some surviving spouses, all verified as eligible with certificates of eligibility (COEs) they receive from the Department of Veterans Affairs. Beyond the no-money-down aspect, a big benefit of a VA loan is that you don’t have to get mortgage insurance as you do with other types of mortgages when there’s a down payment of less than 20%.
What are some requirements for VA loans? All eligible buyers must live in the homes they’re getting the loans for; VA loans can’t be used to buy investment properties. And there are generally funding fees to consider with VA loans, though some borrowers may be able to get these waived, as is the case with some disabled veterans and recipients of Purple Hearts.
Do you feel it’s time you owned your own home but don’t have quite enough cash for the down payment? If you’re on solid financial ground, an 80/20 mortgage may be the best way to realize your dream of becoming a homeowner. Contact us today to talk about how you may be able to buy a home with no money down.