Home prices rose 6.8% in February as compared to the previous year and home data and analytic firm, CoreLogic sees no end to the increase in sight.
Prices are forecast to continue rising by 5.2% on a yearly basis, with buyers seeking moderately priced homes feeling the squeeze. “Home prices continue to rise across the U.S. with every state posting year-over-year gains during the last 12 months,” said Anand Nallathambi, president and CEO of CoreLogic, in a release. “Improved economic conditions and tight inventories continue to drive exceptionally strong gains in many markets, especially for homes priced below $500,000.”
Swelling prices and demand have placed a number of cash strapped homebuyers in a precarious position. Lauren Sinha, Realtor at Coldwell Banker Seal of Portland West in Oregon, says most of her clients are writing love letters to sellers and some are having to take big risks, even going as far as waiving the inspection in order to score a home.
“Many of my clients are writing up to six offers before they finally have a deal,” Sinha recounts. “My market is especially hot as Standard & Poor's/Case-Shiller home price index reports prices in my market soared to over 11.8%, which is leaving less money in my buyer’s pocket for their down payment. Plus inventory is at historical lows, which is creating a number of hurdles for buyers to navigate.”
With the home price needle being moved further back on buyers, the down payment they may have saved six months to a year ago may not cover the traditional 20% down needed to secure a conventional loan without having to pay private mortgage insurance today.
“For the most part, many of my buyers are unable to meet that 20% down payment, even though they have secure, well-paying jobs and exceptional credit,” Sinha says. “Prices keep moving higher, which is making a large down payment more challenging, but there are a multitude of mortgage loan options for buyers where they don’t need PMI and can still secure a loan at a good rate.”
Where Do Buyers Start?
Especially for first time homebuyers, knowing where to start the mortgage process and how to proceed when you don't have 20% for a down payment is critical to finding the right loan situation.
Erin Lantz, vice president of mortgages from online home resource Zillow says although options are available, they may not be as readily offered.
“It’s less common for lenders to offer a multitude of programs for buyers who have less than 20% to put down on a mortgage,” she says. “It pays for borrowers to shop around, learn about the various programs such as VA and FHA, but also programs you might find at a credit union, for example.”
Lantz says Zillow has a wealth of resources for buyers, which can help them compare lenders and programs from the comfort of their own home.
“Reviewing options through Zillow is a safe and easy way for the borrower to determine which lenders they should contact, especially when they can use our handy ratings and reviews,” she says. “Borrowers can read about other borrower’s experiences and find out who is a good lender and where are the competitive rates and products.” She adds playing with the site’s mortgage calculators can also help borrowers run a variety of loan scenarios and make adjustments to their financial plan.
Michael Tannenbaum, vice president of mortgages from online lender Social Finance (SoFi), adds that borrowers should make sure they understand the terms, conditions and fees associated with any mortgage loan, regardless of down payment amount.
“For example, we don’t charge prepayment or lender fees,” he says. “We offer a very clean product that is straight forward and easy to understand, but that isn’t always the case with every lender and situation. That’s why it’s critical for the borrower to fully understand what the contract means, especially when working with less than a 20% down payment.”
SoFi offers a mortgage loan product that allows borrowers to put down as little as 10% with no private mortgage insurance requirement. Tannenbaum says loan qualification and approvals are conducted online. “Our company is of the Millennial mindset where an underwritten rate is delivered within a few minutes online. Our product is very transparent and we service all the loans we’ve made.” SoFi is also a unique company because they host a number of meet up events within the markets they service.
“We are currently in 25 states and growing,” Tannenbaum says. “We recently hosted a home buying happy hour where we matched loan officers to borrowers so they could learn more about the home buying process and our products. Although we are online, we still have that human element, which is a natural way for people to learn about products and connect.”
How to Set Yourself Up for Success
While this is true for all borrowers, having squeaky clean credit when faced with a lower down payment is vital to finding the best mortgage program, explains Bill Banfield, vice president of Quicken Loans.
“Don’t shop for a mortgage after you’ve found a home, because you will want to have enough time to ensure your credit truly represents your history,” he says. “In some cases there could be errors or items on your history that can be addressed, which will have an impact on your score.”
Banfield says Quicken offers a variety of options for those are a light on their loan down payment including FHA and VA loans, but also Freddie Mac’s Home Possible mortgage products for borrowers who have as little as 3% down as well as PMI Advantage.
“The point is to talk to a skilled lender before making any decisions on home loans, especially if you have less than 20% for a down payment,” Banfield asserts. “With the different products and scenarios, you should review your financial plan with a lender who knows what is available to best meet your needs.”
Sinha adds that working with a trusted Realtor, who understands the challenges involved in today’s home buying experience can mean the difference between a fab or flop experience. “A Realtor who knows the area and all the risk factors can mean the difference between getting a good deal on a solid home versus a money pit,” Sinha says.