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If you want to buy a house with a small down payment in 2021, be prepared to undergo a reality check.
One of the far-reaching effects of the pandemic is that the 20% down payment is making a comeback.
What needs to be clear is that the lender does not require you to pay a 20% down payment.Mortgage loans backed by the Federal Housing Administration, called Federal Housing Administration Loan, Only a 3.5% down payment and a credit score of at least 580.Veterans can still get Veterans Loan There is no money down. Regular loanWithout government support and stricter credit requirements, down payments as low as 3% are still allowed.
However, this is what a typical down payment in 2021 looks like:
- In April 2021, 25% of residential sales were cash transactions. According to the National Association of Realtors.
- According to the National Association of Realtors, 50% of the remaining three-quarters of home buyers paid at least a 20% down payment.
- In April 2021, only 29% of first-time homebuyers paid a 20% down payment. But first-time home buyers are increasingly being squeezed out of the market. The proportion of buyers who bought their first homes dropped from 36% in April 2020 to 31% a year later.
- The median down payment from September 2020 to February 2021 is 15.9%. According to Redfin data. This is an increase from 15.3% from September 2019 to February 2020.
If the difference between a down payment of 15.9% and a down payment of 15.3% sounds small, consider that the median sales price has risen by nearly 14% over the same period. For home buyers, these figures mean that the down payment is more than $8,500 higher than a year ago.
Why the down payment is getting bigger and bigger in 2021
Even before COVID-19, the construction of new houses did not keep up with population growth.
However, the pandemic triggered a large number of potential buyers in the suburbs, many of whom were able to work remotely for the first time. Historically low interest rates have stimulated demand. The wealthier buyers are seeking second and third homes in record numbers.
However, in uncertain times, owners are often unwilling to put their houses on the market. According to data from the Harvard University Joint Center for Housing Research, between March 2020 and March 2021, housing inventory was reduced by 30%. National Housing Status Report 2021.
Due to such an imbalance between supply and demand, sellers receive an average of five offers when selling their houses. About 50% of the price is higher than the list price. Successful buyers also bring benefits to sellers by investing additional costs, such as paying the seller’s transaction fees or even moving expenses.
However, banks generally will not allow you to finance a house at a price that exceeds the assessed value minus the down payment. In a hot market, the estimated value is usually lower than the list price. When this happens, buyers usually have no choice but to pay extra cash.
For example, suppose you have agreed to pay $300,000, but the appraiser concludes that the house is only worth $250,000. You must take out $50,000 in cash to make up the difference, because your lender will only finance $250,000.
“It is now almost standard to include an evaluation appendix in the offer, and it states in writing that the buyer will bear any and all costs related to the low evaluation,” said broker/owner Tiffany Alexy. Alexis Real Estate Group, In Raleigh, North Carolina. “Now that the house is far beyond the list, this is the only way to make your offer stand out.”
But the potentially huge valuation gap is not the only reason sellers care about the down payment amount. Although the contract varies from state to state, in many states, the seller will see how much the buyer put down and how much they financed. The seller wants to know that the transaction will be completed soon.
“The worst-case scenario for sellers is to accept the offer, let the buyer’s financing fall apart, and then the house will eventually be listed again,” said Chicago-based CEO Sean O’Dowd. Close the concierge, Provide transaction coordination services for agents. “Many people would think that since the house is back on the market, there is a problem with it. This makes it more difficult to sell it again.”
A low down payment does not necessarily mean that the buyer’s financial situation is unstable. In many cases, buyers are just taking advantage of low interest rates or hoping to save cash. But the important thing is the concept.
It is also difficult for any form of financing buyer to compete with cash buyers in terms of speed. Cash transactions can be completed within a few days, while financing transactions can take several weeks.
“In the Denver metropolitan area, we saw dozens of offers for almost every listing within 48 hours of listing,” said Sean Simon, the mortgage originator. Planet Home Loan“Financing buyers must provide assessment gap guarantee, no inspection and faster closing time. Usually we will close the loan within about 30 days, and today we have begun to provide 15 days and 20 days of closing time to help financing the purchase Home competes with cash.”
What about FHA and VA loans?
Sellers are often particularly wary of government-supported financing, such as FHA and VA loans, because they think they are inflexible and take longer to complete.
Part of the reason is that with government-backed loans, the risk of housing evaluation is high.
“FHA’s revised terms stipulate that if the home is not evaluated, buyers can withdraw and get their deposit back,” said David Rider, a certified mortgage consultant and retirement expert. NEXA mortgage In Chandler, Arizona. “In this market, the selling price of houses is much higher than the assessed price. If sellers want to maximize the selling price, it will be difficult for them to accept loans from the State of Virginia, the Federal Housing Administration or the U.S. Department of Agriculture.”
Lenders usually have strict evaluation requirements for government-supported loans. Peter Winscott, a real estate agent in Denver, said: “Lenders will carefully review minor repairs.” orchard“Buyers need to ask sellers to resolve these issues in order to obtain loans, which puts FHA/VA loan buyers at a disadvantage.”
What if you can’t afford the 20% down payment?
Winscott said that if buyers without additional cash can discover the motives of other sellers, they are likely to compete. “For example, sellers usually want extra time to move out, and in many cases, they still need to find the next home,” he said. “Therefore, for sellers, providing long-term seller rent back may ultimately be more important than high prices.”
In some cases, buyers will even offer sellers one or two months of free stay.
Writing a heartfelt letter to the seller has also proved to be a winning weapon for some buyers. But this is a controversial issue.In fact, the National Association of Realtors advises agents not to help clients draft or send “love letters” and avoid reading them because of the details they reveal Often causes fair housing problems.
You can also speed up the process to make your offer attractive. For example, you can take a house inspector out immediately instead of waiting a week.
Avoiding unexpected circumstances and allowing you to exit the transaction may make your offer more attractive. But you should do this very carefully. For example, when you give up the financing contingency, if the transaction fails, you will forfeit the deposit because you cannot fund the purchase. Only when you are confident that you have the ability to make up any difference between the quoted price and the assessed value, you should give up the assessment of contingency costs.
But remember, according to the Standard & Poor’s CoreLogic Case-Shiller House Price Index, house prices are rising at the fastest rate since December 2005. Many housing experts believe that as life returns to normal, the housing market will begin to cool. Many workers still don’t know if they can work from home permanently. Many empty nesters who were planning to downsize or move to high-end communities postponed the sale. As the uncertainty subsides, inventory may gradually increase.
Robert Schiller, Yale University economist and co-founder of the Case-Schiller Index Tell Yahoo recently!financial He expects house prices to “fall back, not overnight, but enough to cause some pain.”
If you lack cash reserves, it may be worthwhile to wait to buy-both to save more money and to see how the real estate market fluctuates. It can be frustrating to hear this, especially if you have been waiting for a while.
However, the right time to buy a house depends on your personal circumstances and the real estate market.A good rule of thumb is that your mortgage payment should not exceed 28% of pre-tax income. There are three to six months Emergency fund In addition, a down payment is also essential.
Bottom line: Don’t let the fear of missing out on opportunities drive you to buy an unaffordable home. If you are planning to buy a house now, please be prepared to adjust your budget upwards or reduce your house purchases.
Robin Hartill is the senior writer of The Penny Hoarder. She wrote a column of personal financial advice for Dear Penny.Send your tough money questions to [email protected].
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