Home Affordability
Always the biggest question when someone is looking to buy a home. “How much do I qualify for”? The true question you are asking is “what is my home affordability?”.
Per dictionary.com, Affordable: Adjective 1. That can be afforded; believed to be within one’s financial means: noun 2. Usually affordable. Items expenses,etc., that one can afford. Afford, verb 1. To be able to do, manage, or bear without serious consequence or adverse effect. 2. To be able to meet the expense of; have or be able to spare the price of: 3. To be able to give or spare: 4. To furnish; supply 5. To be capable of yielding or providing: 6. To give or confer upon.
This word or should I say words are in the back of the millennial generations mind when it comes to most anything. With the generation that carries the largest debt of any generation that came before it, specifically, millennials carry an “estimated $1.1 trillion of the country’s $3.6 trillion in consumer debt”[1]. Because of this, this generation knows how to research and ask the correct questions to see if the cost will outweigh the benefits. You better believe that means if we see avocados on sale at the grocery store we are eating avocado toast every morning for breakfast for the next 2 weeks.
Many of which have come from households that were hit with the mortgage crisis and their parents or even grandparents may have lost their homes to foreclosure and/or had to file bankruptcy or perhaps both. So they know the consequences of having their expenses be limited and living within their means. Affordability is top of their mind.
With that said, millennials will look at real estate very cautiously and will search the web for all the information they can find about home affordability. Checking out home affordability calculators, then searching loan programs and down payment requirements. All of this is good and recommended. But there are areas you need to be mindful of when thinking about home affordability, such as rates and rate of index increases on home values.
The federal reserve is set to raise rates at least 1 more time before 2019 comes to an end[2]. That means soon we will be out of the still, record low-interest rates and into something that might will hinder the affordability for the debt-ridden millennials. The higher rates will drive up your monthly mortgage payment.
As of September 28, 2018, rates are at a 2 week low[3]. This is your chance to act while they remain lower. There is still more positive news, homes selling above list price just dropped below 2016 Levels[4]. With the market starting to level and slowing down a bit this means the competition won’t be as feverish as it has been these past 2 years. There will be less discouragement when submitting an offer, as you will not see as much overbidding, as well as, fewer cash buyers. We will start to see a little more flexibility between buyers and sellers.
Coupled with the market adjusting to more paced increases in value there are also plenty of loan programs. Loan options that are geared toward helping first time home buyers, self-employed buyers, and more jumbo loan options. All of which help not only first time home buyers but also the seasoned home buyer. For example, these programs include a lower down payment, bank statement qualifications, lower credit score requirements, and a few others.
Most people still think that a 20% down payment is mandatory and/or required. Which is not the case. Both FHA and Conventional (FHA vs. Conventional, which is better for you) loans have lower down payment options available for the borrower who doesn’t have $30,000 in the bank. With a minimum down payment of 3-5%. For those who still don’t have the luxury of having that minimum down payment saved there are still other options and resources that they can take advantage of.[5]
Alternative Down Payment Options:
- Gift Funds– A family member (parents, grandparents, aunt/uncle, sibling) can gift you money for down payment.
- Down Payment Assistance (DPA)– There are a few down payment assistance options.
- A Grant– Up to 4% down payment assistance. It is completed through your first mortgage through the interest rate. Higher rates will apply.
- Silent Second (0%)- A second loan at 0% interest rate and up to 5% down payment assistance. It does not require a monthly payment, it gets paid back once you sell or refinance the property.
- Local Organizations- These are known as CHAC (Denver only), HOAP(Aurora only) and Adams County, these options are only available if funds have not all been used.
All of these options may be available to you but you would need to discuss with your lender. As well as seeing which option makes the most sense for you and if you qualify.
The question you need to ask yourself is what will a home cost next year? Is waiting going to be of a benefit to you? Real Estate in Colorado is still expected to increase. The rate of increase may slow down but nonetheless will still increase. Should you choose to wait, be prepared that the homes you are looking at today will be a higher purchase price next year. What does that mean? It means your home affordability will decrease, the amount you need to put down will increase and the rate at which you will be borrowing will be higher. It’s time to get off the fence and at least put your toe in the water. What is the cost of waiting? See what you can do, call us today to find out what you can afford.
Disclaimer: “The views, articles, postings and other information listed on this website are personal and do not necessarily represent the opinion or the position of American Pacific Mortgage Corporation.”
[1] https://www.businessinsider.com/record-millennial-debt-a-drag-on-the-economy-2017-4
[2] https://www.foxbusiness.com/markets/fed-hikes-interest-rates-sets-three-increases-for-2019
[3] http://www.mortgagenewsdaily.com/consumer_rates/876837.aspx
[5] https://www.mortgage-maestro.com/disclosures/
