Buying a house is certainly a smart financial move given low mortgage rates and the most affordable home prices, ever. Each market is different so for our purposes we will be looking at the Sonoma County California housing market. Following is what you can expect if you plan to purchase a house in Sonoma County this year:
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 go so far as to say for every house on the market, there is at least five buyers. These buyers are cash investors, others are preapproved home buyers, many are are buying a home for the first time. The competition is strong so being very focused becomes crucial.
Type of Real Estate Transaction
Is the property you are buying an Reo or Short Sale?
REO’s are bank owned properties where the bank is the seller.
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 whoever 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 asked 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 are homes being sold for less than the mortgage balance owed on the property.
Short sales take longer than REO’s because the original lending bank has to agree to lose money on the transaction to allow the sale to proceed.
For example -
House listing price $300,000
Loans tied to the property $500,000
Original bank loses $200,000+
The bank is being shorted the amount they otherwise would have been paid off 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 3 to 6 months from start to finish.
Many listing agents tell potential home buyers “the property won’t go FHA or government financing.” Many times, the properties will go FHA or even USDA mortgage financing. In other words, the type of financing you might be preapproved for could be ineligible for the property that you would like to purchase. You want to make sure to connect with your buyer’s agent to determine if the property has any potential health and safety concerns, something FHA loans require to be cured.
Typical items that would need to be fixed prior to closing are….
- Open and exposed wiring
- Peeling paint on the exterior or interior of the home
- Dry rot damage
- Anything would be an obvious concern to a real estate appraiser in their visual inspection
*Mortgage tip: If the property you are seeking to purchase does have potential concerns. Negotiate for these fixes to be repaired by the seller and/or the listing agent prior to closing.
Bank owned properties owned by Fannie Mae are eligible for Home Path Mortgage financing. The 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 loans are quite high. Upwards of four discount points are not uncommon.
A frequent scenario is quite common: your 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 Homepath financing.
If you can qualify for another ancillary mortgage program, such as Home Path financing or FHA 203K financing, the mortgage lender will qualify you up front. This way you will be able to effectively make an offer to purchase a property without having to get re-qualified all over again.
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 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 a monthly basis by making sure you get preapproved with a mortgage lender up front. 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 too strong to low ball, generally
- Don’t be concerned with what the original buyer paid for the home. This is especially true in flip transactions. This is where 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 area 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.
Here is is 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 days or 12 days, but make sure to have a conversation with your mortgage lender first.
- Change your down payment: even if the purchase price is higher, a 20% down conventional loan on paper, still looks better than a 3.5% down FHA program. Every seller and transaction is uniquely different, so this might not apply in all situations, generally 20% down conventional financing is very strong.
- Change seller credits for closing costs: seller credits for closing costs means a less “net” to the seller. An offer with no closing costs again (price is also a factor here) is typically stronger than an offer asking for seller credits
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.
Mortgage Loan Program
What mortgage mortgage payment can you afford over the long haul? You’ll want to make sure you have your mortgage payment calculated upfront before and during the house hunting process. You’ll probably also want to get a final idea of what your mortgage payment will look like before you actually make an offer to buy a house. Depending on your qualifying ability; down payment, credit score and debt to income ratio, you’ll want to be preapproved up front for all available programs you can qualify for, not just pigeonholed into one loan program. Not only does this make sense for mortgage shopping purposes, it gives you the pros and cons to each mortgage loan program so you can decide which type of financing best suits your needs as a home buyer.
If you will be seeking mortgage loan financing, know this, mortgage rates change several times per day every day five days per week. This is is a very component of your real estate transaction because it affects your purchasing power.
As mortgage rates ↑ purchasing power (how much house you can buy) ↓
As mortgage rates ↓ purchasing power ↑
As mortgage rates stabilize 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, till 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 preapproval’s 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 that you’ve selected how that 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 okay 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 working with an expert realtor and a mortgage lender. If you’re considering buying a house, start by getting a complementary purchase mortgage rate quote. Learn what to expect when buying a house.