Attention First-Time Buyers: Here’s the Key Stuff You Don’t Know About Mortgages
When it comes to mortgages, there’s a big gap between what people think they need in order to get one and the reality of what buyers are successfully doing—especially young people.
But you know what? When it comes to what might be the biggest purchase of your life—one that can be incredibly intimidating for first-time buyers—it’s nice to know real facts. And in the mortgage market, reality is very often different from perception. Or, for that matter, myth.
Last week, the National Association of Realtors® issued its 2017 Aspiring Home Buyers Profile report. The report cites data from surveys taken in the third quarter of 2016 about down payments.
The report summarized that 39% of nonowners believe they need more than 20% for a down payment on a home, 26% believe they need to put down 15% to 20%, and 22% believe a down payment of 10% to 14% would work.
So on average, those nonowners thought a down payment would need to be about 16%. The reality? The average down payment on purchase mortgages in 2016 was 11%.
In fact, when we drill into the purchase mortgages taken out by people under 35, who represent the majority of first-time buyers, we see the average down payment was even lower, at just under 8%. In other words, aspiring first-time buyers think it takes twice as much to buy a home than it really does.
Perception, meet reality
But averages can be misleading, right? Especially when there is a wide distribution, like we observe with down payments. When we dig into what actually happened in 2016 we find that most young people buy homes with … less than 5% down. That’s less than one-third of what the average nonowner had assumed!
As with many things in life, the most correct answer to the question of how much you need to put down is “it depends.” There are a slew of important factors like who you are, your financial circumstances, the home’s location, and the price of the home.
It is possible to buy a home with a mortgage with no money down. VA and USDA loans are the most popular loans that offer the ability to put no money down. In 2016, 16% of buyers under 35 put no money down.
The largest share (36%) of loans for buyers under 35 in 2016 was for people putting down something less than 5%. The options there include loans offered through the U.S. Department of Veterans Affairs and the U.S. Department of Agriculture, but also 3% down payment programs backed by Fannie Mae and Freddie Mac (aka conforming loans). And, of course, this includes the traditional 3.5% FHA mortgage that is primarily targeted to first-time buyers.
More than half of young people who successfully bought a home with a mortgage in 2016 put at most 5% down. The average dollar amount for these buyers was $3,500. That’s right, if you have #FOMO from your friends buying homes, the majority of them are putting down just a few thousand dollars.
How are they doing it? The aforementioned mortgage products (conforming, FHA, VA, and USDA) represent almost 99% of the mortgages to people under 35 in 2016. There is nothing exotic about this.
And it doesn’t require perfect credit, just fair credit. The average FICO was 713, and the floor we observed in FICOs (below which very few mortgages were made) was 639.
Put that all together and you can see that for the millennial dreaming of buying a home this year, you need a FICO score of at least 639 and enough money that you could put down at most 5%. If you live in a typical American town, what you need could be as little as $3,500.
That sounds a lot more attainable than most people think. The truth is out there! Take advantage of it.
Article source: Jonathan Smoke for Realtor.com.
When preparing to buy a home, it is good to revisit some of the lessons our parents and grandparents learned long ago.
HOW MUCH CAN I AFFORD?
Your housing budget depends on your situation and priorities. Two-income households with strong earnings potential can probably spend a little bit more than one-income households — as your income rises over the years, your housing costs are likely to become a smaller piece of your expenses. (Of course, that is not necessarily the case if you later buy a bigger house.) The same goes for individuals who have saved extra money or people who may earn less, like teachers, but who are unlikely to lose their jobs. Just be sure you stick with a plain-vanilla 30-year fixed mortgage because payments will remain steady.
One exercise I remember from school involves simple math and planning. Write down all of your expenses. Break them down into expenses that are fixed (utilities, groceries, auto expenses, insurance, etc.) and variable (everything else). Now, look at the variable costs…what am I willing to give up that could be reallocated toward housing?
Another exercise is to start by establishing savings goals, and then working backward. Set aside 10 to 15 percent of your salary, preferably in tax-deferred accounts, and then work with what’s left over for living expenses and housing costs.
DO THE MATH
Before you start hitting open houses, sketch out a rough budget based on the 28 percent rule of thumb, using a simple mortgage calculator. For instance, a family that earns $10,000 a month — or about $7,000 after taxes — should keep their total monthly housing costs, including mortgage, taxes and insurance, to about $2,800 a month. In one example, the family may be able to spend $440,000 on a home, or about 3.6 times their annual income, as long as they can come up with a 20 percent down payment (and closing costs). If they finance the remaining $352,000 with a 30-year mortgage with a fixed rate of 5.5 percent (of course lower rates are available, but let’s be conservative here), that would translate into a monthly payment of about $2,000, leaving $800 to pay real estate taxes and insurance. That leaves $4,200 of their monthly after-tax income to pay for everything else, giving them some breathing room.
A higher down payment is usually required, but if you have a good credit score, you can get by today with historically lower down payments (FHA loans are also an option). If you do not, or cannot afford a higher down payment, it can cost you dearly in the form of a higher interest rate or fees. The ability to put down at least 20 percent is often emblematic of your financial discipline and ability to afford the monthly payment.
Consider the tax savings associated with buying a home, but do not use it as an excuse to buy more than you can afford. Property taxes and mortgage interest are generally tax-deductible, but only if you itemize your deductions. Itemizing makes sense when your individual deductions exceed the standard deduction. For many taxpayers in the 28 percent tax bracket who itemize, a $350,000 mortgage may reduce their tax bill by as much as $5,357 in the first year of the mortgage. Since you pay more in interest in the loan’s early years, your tax savings will decline over time.
Ideally, homeowners should have six months of net pay in the bank. But if you halve that figure and save three months of your take-home pay that generally translates into eight months of payments. That does not account for food and other necessities, but it does provide some cushion. Two-income households can get away with just a few months of savings put aside, but single-breadwinner households should have at least six months. You also need to account for unforeseen costs.
To the homebuyer or the homeowner, saleability matters!
What makes a house sell?
Whether you are a homeowner thinking about selling or a homebuyer in the market for anew home, saleability matters! You want to make sure you are taking care of and getting the most from your real estate investment. This month we are exploring the keys to making your home more appealing to the buyer, AND how to add value to your real estate investment. There are many ways to do both – from home improvements to “fixing up” before your home goes on the market, to pricing and location – they all factor in to your home having “saleability”.
What makes a house sell?
A successful sale requires that you concentrate on six considerations:
- the listing price
- the terms of sale
- the condition of your house
- location of the house
- accessibility, and
- Marketing exposure your house receives.
While some of these factors are beyond your control (such as the list price the market demands), you can compensate by taking advantage of other items, like a new paint job or landscaping the front yard, to make your property as attractive to prospective buyers as possible.
What about home improvements?
Renovating your home for sale may or may not be a wise move depending on how much you plan to spend. In some cases, a home is in bad shape and the money must be spent to make it salable. On the other hand, spending too much may represent a loss. It is important to discuss with your real estate agent how much home improvement upgrades needs to be done. A new toilet, sink, and shower stall in your bathroom, a new paint job for the first level floor, and new kitchen sink fixtures might create the best overall value for the least investment. Your agent can tell you after an evaluation what aspects of your home are a liability and which problems will actually kill the sale. An experienced agent will know what they need to fix to make the sale. Other issues can be negotiated.
Statistically, there is only one improvement that a homeowner can make which will actually produce a profit when the home sells. We call it “Paint & Petunias”. Yes, it’s curb appeal. Research available from the Real Estate Center at Texas A&M University tells us that paint touch up and minor landscaping will actually return 109% of its cost. It is interesting to note that research shows yellow flowers are the most appealing to prospective homebuyers.
The same Real Estate Center report says that other fix-ups and updates return less than their actual cost. A kitchen refurbishment will return about 78% of cost on average, and a bathroom update recoups about 67% of the cost for a Seller. In addition, the lowest recapture of investment is the good ol’ swimming pool. It will return about 15 to 20% of the installation cost.
The obvious question is: “If I’m going to take a loss on the improvements, why do them anyway?” Think of it this way: your house might not be competitive and won’t sell at all without the updates. The partial “loss” on a component upgrade will actually make the overall product, your home, sell more quickly and for more money.
“Staging” is the latest buzzword in real estate, but it simply means to present your home in its best and most appealing light. If you are preparing your home to sell, it is to setup your home to appeal to prospective buyers and showcase the property in a way that makes buyers eager to purchase! In theory, “staging” isn’t hard or costly, but in reality, many homeowners find it difficult because it’s often hard to see something objectively when we love it.
Professionally staged homes sell in 80% less time than non-staged homes, according to a survey conducted by ASP* (Accredited Staging Professional). The money spent on staging will always be less than your first price reduction and statistics also show that 94.6% of staged homes sell on average in 35 days or less.
The following is HomeGain.com’s national survey, based on the ten areas of home improvement identified by real estate agents in HomeGain’s survey. They are listed from the highest to lowest returns on investment:
|Clean and de-Clutter||$100 – 200||$1,500 – 2,000||872%|
|Stage Home for Sale||$300 – 400||$1,500 – 2,000||586%|
|Lighten and brighten||$200 – 300||$1,000 – 1,500||572%|
|Landscape Front/back||$300 – 400||$1,500 – 2,000||473%|
|Repair Plumbing||$300 – 400||$1,000 – 1,500||327%|
|Update Electrical||$300 – 400||$1,000 – 1,500||309%|
|Replace/Clean Carpets||$400 – 500||$1,000 – 1,500||295%|
|Paint Interior Walls||$500 – 750||$1,500 – 2,000||250%|
|Repair Damaged Floor||$500 – 750||$1,500 – 2,000||250%|
|Update Kitchen||$1000-1500||$2,000 – 3,000||237%|
|Paint Outside||$750 – 1000||$1,500 – 2,000||201%|
|Update Bathroom||$750 – 1000||$1,000 – 1,500||172%|
If you are thinking about selling your home, contact Norma and her team today to get more information about the options available to you.
Our lives are a series of changes, many that we initiate and many that are out of our control. We reinvent ourselves, our children grow up and leave home, we get divorced or struggle through personal loss of a loved one. Whatever it may be, we find ourselves with choices. One of those choices is where to live and HOW to live.
POSSIBILITIES FOR EMPTY NESTERS
For many people, being an “EMPTY NESTER” offers seemingly unlimited possibilities. Some of the most popular choices include:
Move to the mountains, lake or ocean to enjoy resort-style living: This is a great option for the over 65 crowd, or for those who are ready and willing to pull up your roots and relocate to a more desireable area to live and play!
Pay off your mortgage and stay put: You may be perfectly happy as an empty nester and ready to settle into the peace and quiet of your home. Consider planting that garden you have always wanted or build a workshop for your hobby. Who knows there may be a new business in the making!
Downsizing: Selling a large house and opting to move into a smaller house, apartment, condo or retirement housing is often a good decision, especially if the mortgage on your existing house is paid off.
Going into business: If you have a large house (or the money to invest in one) and a flair for hospitality, you may wish to consider running a bed-and-breakfast out of your home. This can be a great source of income, particularly if you live in a touristy or urban area, or near a college – these areas have lots of travelers arriving at various times during the year.
Hosting an exchange student: Providing a temporary home for a foreign-exchange student can be a rewarding experience. Empty nesters who miss having children and teenagers around often enjoy having a young person in the house again, and they get the opportunity to learn about other cultures from the students they host.
THE EMOTIONAL FACTOR
Transitioning from an active household to an empty nester can be an emotionally troubling time. Some people lose their sense of purpose when their children leave home or when they find themselves alone from divorce or death. Others are reluctant to sell the house in which they watched their children grow up and where so many memories have been made. But staying in a house that’s too big for your needs can create an unnecessary tax burden. It’s always better, from a strict financial standpoint, to downsize or use your larger home to generate income. But take the time to make sure it’s the best decision for you emotionally.
REAL ESTATE DIVERSITY OFFERS OPTIONS
Whether you are living in Dallas Fort Worth, Austin, Portland, San Diego or Boston, the diversity in real estate offers generous opportunities for the empty nester. Finding the type of home that fits your needs is key. Here’s our list of options that match the statement for your lifestyle choice. What would you choose?
Luxury, downtown or historic lofts – I like open space and want to be around people and the buzz of activity. I am an artist and want lots of open space and light.
Luxury high-rise – I want something with a fabulous view of the city and concierge services.
Townhomes and condominiums – I like living around a lot of people but I’m done with yard work!
Mixed-use Development living – I want to be close to shopping and food, no more commuting for me!
Suburban homes – The kids and grandkids are around the corner and I want to stay active in the grandkids school activities.
Luxury homes – I have worked hard to get to my position and with the money I have saved and earned from my investments, I intend to live in style!
Farm and Ranch – I hate traffic and the city, I want land and space to breathe and enjoy the peace and quiet.
Mobile and modular homes – I am on a limited income now and just need to get into something that will be easy on my pocketbook.
Lake homes – I’m ready to retire and fish and play!
Duplexes – It would be nice to have rental income to help on my house payment.
Garden/zero lot homes – I want a real house but since the kids are gone, I don’t need a big yard, besides, I hate to do yard work!
Vacation homes – I need a small place I can escape to but don’t want to give up my home and all it’s memories.
Gated communities – I want a place to feel safe and secure.
Remember, when you decide to make a move, don’t do it alone. Contact The Norma Langston Home Team and we will be there for you every step of the way!