|What to expect when buying a house in today’s market
Buying a house is certainly a smart financial move given the low mortgage rates and the most affordable home prices on the market today.
Each market is different, so for our purposes, we will be looking at the Sonoma County California housing market.
Supply versus demand
Our supply of available homes on the market for sale is quite small, relative to the amount of potential home buyers. We would even go so far as to say for every house on the market, there are at least five buyers. These buyers are cash investors, others are preapproved home buyers, and many are buying a home for the first time.
Types of transactions
Is the property you are buying an REO or short sale? (REOs are bank owned properties where the bank is the seller and short sales are homes being sold for less than the mortgage balance owed on the property.)
In such scenarios, the bank (in many cases) will require you to get a second mortgage loan preapproval through their own mortgage lender in an effort to make sure you are truly qualified for financing.
Let it be known that particular bank is also trying to secure your new purchase loan. As a home buyer, you can choose to work with whomever you like.
Multiple offer situations in REOs are also very common. If there are multiple offer situations, the bank does what’s called the “highest and best,” where they go back to each buyer and ask them to submit their highest and best offer. The bank then waits for the highest offer to come in. When you have multiple buyers, you can see why this situation gets competitive.
Short sales take longer than REOs because the original lending bank has to agree to lose money on the transaction to allow the sale to proceed.
For example, if the house listing price is $300,000 with loans tied to the property at $500,000, the original bank loses $200,000-plus. The bank is being shorted the amount they otherwise would have been paid if the house sold for $500,000.
These transactions also sometimes receive multiple offers, but generally the competition is less fierce than on bank-owned properties. The trade-off on a short sale is less competition in exchange for a longer period of time, so be patient. These transactions can take anywhere between three to six months from start to finish.
Bank owned properties owned by Fannie Mae are eligible for the Home Path Mortgage financing program. This program provides for no mortgage insurance and no appraisal for the transaction. On the flipside, the inherent costs associated with getting a Home Path Mortgage loan are quite high; upwards of four discount points is not uncommon.
A quite common (and frequent) scenario is: you’re pre-approved as a Sonoma county buyer, with XYZ mortgage financing. After searching for a couple of homes, you find a property that needs to be rehabilitated. Your real estate agent tells you to ask your mortgage lender if you can qualify for FHA 203K financing or Home Path Mortgage financing.
As a home buyer, you make an offer on a house in an attempt to gain acceptance so you have the right to purchase the home. Your transaction would be based on your real estate contract and mortgage loan financing and of course, what your mortgage payment will be over the life of the loan. Focus on how much you can afford on a monthly basis by making sure you get preapproved with a mortgage lender upfront. Know your numbers before you make an offer on the house.
• Put your strongest offer in upfront, with the ratio of 5:1 buyers to available homes, the competition is generally too strong to low ball.
• Don’t be concerned with what the original buyer paid for the home. This is especially true in flip transactions. This is where an investor purchased the property at a steep discount, fixed it up and now they’re selling it for a nice profit. Ask yourself, “Is the home worth what they are asking in the condition it is in presently? Are there other homes in and around the surrounding area that have sold for similar purchase prices?”
If the answer is “yes” to both, make a firm offer based on what you can afford and make it strong.
How to make your offer standout when buying a house:
• Change mortgage loan programs if the seller is requiring a certain type of mortgage financing and you can qualify, consider going with that program.
• Change the purchase price. Raising or lowering the purchase price can affect the final outcome.
• Change the contingency. In a real estate purchase transaction, you usually have 17 days to remove appraisal and loan contingencies. Consider changing these contingencies to 15 or even 12 days, but make sure to have a conversation with your mortgage lender first.
• Change seller credits for closing costs. Seller credits for closing costs means a less “net” to the seller. An offer with no closing costs is typically stronger than an offer asking for seller credits. (Again, price is also a factor here.)
By making slight adjustments to these variables, you can position yourself stronger as a home buyer when making a potential offer to a home seller.
If you will be seeking mortgage loan financing, know this: mortgage rates change several times per day, five days per week. This is a very important component of your real estate transaction because it affects your purchasing power.
As mortgage rates rise, purchasing power (how much house you can buy) goes down. And as mortgage rates go down, your purchasing power goes up. But as mortgage rates stabilize, your purchasing power remains unchanged.
Mortgage interest rates influence purchasing power – so be sure you are in regular communication with your mortgage lender for any changes in your preapproval.
From the time you’re preapproved until the time you actually purchase a house, you will probably have to be preapproved two or three more times. That involves providing updated pay stubs and bank statements if required by your mortgage lender.
As long as you do nothing different with your credit, debt or income, a preapproval will last 90 days.
Mortgage preapprovals are good for 90 days because credit reports are only good for 90 days. Most lenders will have to do a new credit check every 90 days.
This does vary from lender to lender so be sure to ask the lender you’ve selected how the process works for them.
Generally, you can be pre-approved one time and as long as your finances have remained identical at the time you get the contract, you should be OK only having done one preapproval.
Buying a house requires careful consideration of all the variables included. Mortgage rates have never been lower and the home buying process can be simplified by working with an expert Realtor and a mortgage lender.
(This column was edited because of space limitations. For the full column, go to www.thecommunityvoice.com.)
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.