If you want to buy a home in 2021 with a small down payment, get ready for a reality check.
One of the long-term consequences of the pandemic is that the first 20% payment is starting to come back.
Just to be clear: Lenders don’t ask you to take a 20% discount. Mortgages backed by the Federal Housing Administration, known as FHA Loans, requires only 3.5% minimum with a minimum credit score of 580. Veterans can still get a file VA loan With no money. conventional loansقروض, which is not backed by the government and has stricter credit requirements, still allows down payments as low as 3%.
However, here’s what a typical first batch looks like in 2021:
- 25% of residential sales were cash deals in April 2021, According to the National Association of Realtors.
- Of the remaining three-quarters of buyers who financed a home, 50% paid at least a 20% down payment, the National Association of Realtors reports.
- Only 29% of first-time homebuyers made a 20% down payment in April 2021. But first-time buyers are increasingly exiting the market. The percentage of buyers who bought a first home fell from 36% in April 2020 to 31% a year later.
- The average first batch from September 2020 through February 2021 was 15.9%, According to Redfin . data. This is up from 15.3% for September 2019 through February 2020.
If the difference between a 15.9% down payment versus a 15.3% down payment doesn’t seem like much, consider that the average sales price has gone up about 14% over the same period. For home buyers, those numbers translated into a higher down payment of more than $8,500 compared to the previous year.
Why Down Payments Increase in 2021
Even before COVID-19, new home construction was not keeping pace with population growth.
But the pandemic has unleashed a flood of potential buyers, many of whom have the ability to work remotely for the first time, in suburban areas. Historically low interest rates have increased demand. Richer buyers sought out second and third homes in record numbers.
But owners are often reluctant to put their homes on the market in turbulent times. Between March 2020 and March 2021, the housing stock shrank 30%, according to the Harvard Joint Center for Housing Studies. Housing Situation Report 2021.
With supply and demand out of the game, sellers get an average of five bids when they sell their homes. About 50% go for over list price. Successful buyers also improve the deal for sellers by offering extras, such as paying seller closing costs or even their moving expenses.
But banks usually don’t allow you to finance a home for more than the appraised value minus the down payment. In a red-hot market, the estimated values are often below the list price. When this happens, buyers often have no other choice but to face the extra cash.
For example, suppose you agreed to pay $300,000, but the appraiser concluded that the home was worth only $250,000. You should come up with $50,000 cash to cover the difference because your lender will only fund $250,000.
Tiffany Alexei, Realtor/Owner said قال Alexi Real Estate Group, in Raleigh, North Carolina. “With homes still on the list now, this is the only way to make your offer stand out.”
But the potential for a wide appraisal gap isn’t the only reason sellers care about the size of the down payment. Although contracts vary by state, in many states the seller sees how much the buyer is failing and how much the financing is. Sellers want to know that the deal will close quickly.
“The worst-case scenario for a seller is accepting an offer, which causes buyers’ financing to collapse, and then the house ends up back on the market,” said Sean O’Dowd, CEO of the Chicago-based company. Concierge close, which provides transaction coordination services to agents. Many people will then assume, since the house is back on the market, that something is wrong with it. It makes it more difficult to sell again.”
A low down payment does not necessarily mean that the buyer has shaky finances. In many cases, the buyer is simply taking advantage of lower interest rates or looking to conserve cash. But perception is important.
It is also difficult for buyers with any type of financing to compete with cash buyers in terms of speed. A cash transaction can be closed in a few days versus several weeks for a funded transaction.
“In the Denver metro area, we’re seeing dozens of offers on nearly every listing within 48 hours of entering the market,” said Sean Simon, a mortgage loan originator at The Denver metro area. Lending the Planet. Funded buyers are required to offer assessment gap guarantees, examination waivers, and faster closing times. We typically close loans in about 30 days, and today we’re starting to offer 15-day and 20-day closing offers to help funded buyers compete with cash.”
What about FHA and VA?
Sellers tend to be especially wary of government-backed financing, such as FHA and VA loans, because they believe they are inflexible and take longer to close.
This is partly because with government-backed loans, a lot is at stake in home valuation.
“The FHA’s amendment clause states that if the home is not appraised, the buyer can step back and get their earnest deposit back,” said David Ryder, a certified mortgage advisor and retirement specialist. Mortgage in Nexa In Chandler, Arizona. “In this market, where homes are selling for an appraised price, it puts the seller in a difficult position to accept a VA, FHA, or USDA loan if they want to maximize their sales price.”
Lenders often have strict assessment requirements for government-backed loans. Peter Winscott, a Denver real estate agent, said: grove. “The buyer will need to ask the seller to fix these issues until the loan takes effect, which puts the FHA/Veterans Assistance buyer at a disadvantage.”
What if you can’t afford a 20% down payment?
Winscott said it’s possible for buyers who don’t have the extra cash to compete if they can reveal the seller’s other motives. “For example, sellers usually want extra time to get out, and in many cases, they still need to find their next home,” he said. “So offering the seller an extended lease may ultimately be more important than the top dollar for the seller.”
In some cases, buyers offer a month or two of free occupancy to the seller.
Writing an honest letter to the seller has also proven to be a winning strategy for some buyers. But it is controversial. In fact, the National Association of Realtors advises agents not to help clients craft or send “love letters” and to avoid reading them because the details they disclose It often raises concerns about fair housing.
You may also be able to make your presentation attractive by speeding up the process. For example, you can bring in a home inspector right away, rather than waiting a week.
A contingency waiver, which allows you to back out of a deal, may make your offer more attractive. But you should do it only with extreme caution. For example, when you waive the financing contingency, you lose your deposit if the deal fails because you can’t fund the purchase. You should only waive the contingency of evaluation if you are confident that you will be able to make up any difference between your offer and the estimated value.
But keep in mind that home prices are rising at their fastest pace since December 2005, according to the S&P CoreLogic Case-Shiller Home Price Index. Many housing experts believe that the housing market will begin to calm down as life returns to normal. Many workers still do not know if they will be able to work from home permanently. Lots of empty assholes willing to downsize or move to seniors’ communities have stopped the sale. The inventory is likely to increase gradually as the uncertainty fades.
Robert Shiller, economist at Yale University and co-founder of the Case-Shiller Index Recently said the site Yahoo! finance He expects home prices to fall, not overnight, but enough to cause some pain.
If you are short on cash reserves, it may be worth waiting to buy – to save more money and see how the housing market plays out. It can be frustrating to hear this, especially if you’ve already been waiting for a while.
But the right time to buy a home depends just as much on your personal circumstances as it does on the housing market. A good rule of thumb is that your mortgage payment should not be more than 28% of your pre-tax income. Three to six months later emergency fund Plus the down payment is necessary.
Bottom line: Don’t let the fear of losing drive you to buy a home you can’t afford. And if you’re getting ready to buy a home now, be prepared to adjust your budget up or buy a home less.
Robin Hartell is a senior writer for The Penny Hoarder. She writes a personal financial advice column Dear Penny. Send your tough financial questions to [email protected].