First time buyers and the fog of mortgages
It’s easy to get lost in the fog of home financing, especially if you’re a first time buyer or a buyer who is trying to enter the market with a lower income level. Either way, there are numerous obstacles to overcome and paperwork that may seem impossible to understand. Unfortunately, that’s the culture we created and no matter how many changes are made to the system it never really becomes any easier.
First time home buyers are certainly in the minority on Anna Maria Island, but their fate could affect real estate even in Anna Maria’s high end market. In order to get to the high end market, everyone needs to start someplace, and that place is usually with a first home.
However, first time home buyers are getting more and more sidelined by investors in their quest for a home. During the housing bust, investors bought up bank owned foreclosures and short sales mostly for cash to either flip at a profit or to rent.
That market has dried up, but there are still plenty of investors out there offering all cash deals that first time home buyers can’t match. According to CoreLogic, in October, 25 percent of home sales nationwide were to investors. This is down from the 32 percent peak in 2012, but still 8 percentage points greater than in 2000. To make the market even more toxic for first time buyers, the supply of homes for sale fell to 1.79 million in December, according to the National Association of Realtors, which is only a 3.9 month supply, well below the 6 months considered normal.
There is some good news for first time buyers, who don’t have a lot of cash to put down, assuming they can find a home. In 2014, Freddie Mac and Fannie Mae rolled out a mortgage product that required just 3 percent down. The borrower still had to pay for the private mortgage insurance, which is designed to protect the mortgage lender and investors in the event of default until such time as adequate equity is accrued in the property. In spite of this, the loans still cost more than those that were backed by the Federal Housing Administration (FHA) for first time buyers and the program was not very successful.
Now Bank of America in an attempt to build up the low end mortgage market is also offering 3 percent down mortgages without the requirement of private mortgage insurance in conjunction with Freddie Mac and other partners. This will make the loans less expensive than those offered by the Federal Housing Administration.
One other first time buyer program is called HomeReady, designed for low to moderate income borrowers and administered by Fannie Mae. This program allows more leverage on what is considered income i.e. parent loans, tenant income, etc. It’s a limited and complicated program, which also takes into account student loans, so the fog on this one is pretty thick.
And speaking of parents, if you’re lucky enough to have some that can privately fund your home, you are lucky indeed. Again the fog around these arrangements is pretty dense so you will need professional advice to avoid IRS scrutiny.
Now please keep in mind that anything that has the name of Fannie Mae, Freddie Mac or the FHA on it are loans that are backed and guaranteed by the federal government with our tax dollars. The nerd in me is scared to death of low down payment loans. They smacks of previous, really bad lending practices that created a fog that we don’t want to live through again.
