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Think You Need to Save 20% for a Down Payment? Think Again

Saving for a down payment often represents the biggest hurdle for first-time home buyers. In December, 25% of buyers on realtor.com® who were looking to purchase their first home said a key factor holding them back was lacking funds for a down payment. No matter how you cut it, it represents a big chunk of cash. But here’s the thing: It doesn’t always need to be quite so big as most think.

Many first-time buyers don’t realize that it doesn’t necessarily take 20% down to purchase a home.

Indeed, the average down payment in the U.S. on mortgages used to purchase a home was 11%, according to our analysis of loan records from Optimal Blue, an enterprise lending software company.

As with many stats, that 11% average hides lots of variation across loan types and locations. And for some buyers, it may even take more than 20% to buy a home.

Borrowers with jumbo mortgages had to put the highest percentage down, with an average of 23%. Conforming mortgages averaged 18% in 2016. On the other hand, government-backed FHA, VA, and USDA mortgages featured average down payments of 4.8%, 2.2%, and 0.4%, respectively. These government programs are meant to open up more pathways to homeownership for first-time buyers, veterans, and heads of households in rural areas.

Where you live or are thinking of living can also dramatically affect what it takes to get a mortgage. Higher-cost markets don’t just have higher-priced homes; they also have buyers with higher down payments. Lower-cost markets are just the opposite.

Higher-cost markets tend to have higher down-payment percentages because those more expensive homes are less likely to be covered by low down-payment loans.

Cutting to the chase: Without a higher down payment, the monthly payment simply ends up being too high to afford in an expensive market. Got that? This is why borrowers in high-cost areas have little choice but to put a higher percentage down on top of paying a much higher price.

That’s why, regardless of income levels, it’s so much harder for first-time buyers in high-cost areas.  And homeownership rates, especially for younger households, take a hit.

Deciphering the financial differences

Let’s dive into some specifics so that it is easier to understand the financial differences.

The average purchase price of homes financed with a mortgage was just over $290,000 in 2016 across the U.S. The average down payment amount was $32,680, or 11%.

But in the District of Columbia, where the average purchase price was just over $630,000, the average down payment was almost $110,000, or more than 17%.

That $110,000 could fund more than two-thirds of the average purchase price of $165,000 in Mississippi. And in that low-cost state, the average down payment was under $9,000, or a little more than 5%.

The variances get more extreme as we get more local.

Buyers in San Francisco County put down an average of more than $326,000 on homes purchased in 2016, which represented an average down payment of 29.9%.

In Manhattan, buyers shelled out an average down payment of (gulp) 30.2%, but because the average purchase price was slightly less than San Francisco, the dollar amount of the down payment was a more modest $219,000.

In more rural counties in the South and Midwest, average down payments can be closer to 3% and often amount to $5,000 or less. For example, in Tennessee’s Tipton County, an outer suburban county of Memphis, the average down payment was just over $3,500. The average price of a home purchased with a mortgage in 2016 was just under $138,000.

In Tipton, more than 80% of the mortgages were FHA, VA, or USDA.

So the whole etched-in-stone notion of 20% down payment or bust? Well, it all depends on how you look at it. And where.


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A Tale of Two Markets: Inventory Mismatch Paints a More Detailed Picture

A Tale of Two Markets: Inventory Mismatch Paints a More Detailed Picture | Keeping Current Matters

The inventory of existing homes for sale in today’s market was recently reported to be at a 3.6-month supply according to the National Association of Realtors latest Existing Home Sales Report. Inventory is now 7.1% lower than this time last year, marking the 20th consecutive month of year-over-year drops.

Historically, inventory must reach a 6-month supply for a normal market where home prices appreciate with inflation. Anything less than a 6-month supply is a sellers’ market, where the demand for houses outpaces supply and prices go up.

As you can see from the chart below, the United States has been in a sellers’ market since August 2012, but last month’s numbers reached a new low.

A Tale of Two Markets: Inventory Mismatch Paints a More Detailed Picture | Keeping Current Matters

Recently Trulia revealed that not only is there a shortage of homes on the market in general, but the homes that are available for sale are not meeting the needs of the buyers that are searching.

Homes are generally bucketed into three groups by price range: starter, trade-up, and premium.

Trulia’s market mismatch score measures the search interest of buyers against the category of homes that are available on the market. For example: “if 60% of buyers are searching for starter homes but only 40% of listings are starter homes, [the] market mismatch score for starter homes would be 20.”

The results of their latest analysis are detailed in the chart below.

A Tale of Two Markets: Inventory Mismatch Paints a More Detailed Picture | Keeping Current Matters

Nationally, buyers are searching for starter and trade-up homes and are coming up short with the listings available, leading to a highly competitive seller’s market in these categories. Ninety-two of the top 100 metros have a shortage in trade-up inventory.

Premium homebuyers have the best chance of less competition and a surplus of listings in their price range with an 11-point surplus, leading to more of a buyer’s market.

“It leaves Americans who are in the market for a home increasingly chasing too fewer options in lower price ranges, and sellers of premium homes more likely to be left waiting longer for a buyer.”

 Lawrence Yun, NAR’s Chief Economist doesn’t see an end to this coming any time soon: 

“Competition is likely to heat up even more heading into the spring for house hunters looking for homes in the lower- and mid-market price range.”

Bottom Line

Real estate is local. If you are thinking about buying OR selling this spring, sit with a local real estate professional who can share with you the exact market conditions in your area.


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The Misleading Math Behind the Rent vs. Buy Calculation

There’s about $13.1 trillion stashed away in the United States, in plain sight. Where? In our homes!

Do we have your attention yet?

That’s the total value of the equity held by over 75 million U.S. homeowners, according to the latest estimates from the Federal Reserve Board. And that works out to almost $175,000 per owning household.

This is unmistakable evidence that homeownership is a critical building block of household wealth. Owning a home is a key reason why the median net worth of a homeowner is almost $200,000 while the median net worth of a renting household is just over $5,000.

Sure, part of that is because owners were able to pony up a chunk of money to put down on a house, and to qualify for a mortgage. But the act of paying for a mortgage actually helps produce more wealth, by freezing payment amounts and building equity through forced savings.

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A 30-year amortized, fixed-rate mortgage is a beautiful thing. It provides an affordable path to buying a home while locking in today’s cost of that home for the life of the loan.

The traditional rent versus buy argument compares the total monthly costs of buying a home with a mortgage with the corresponding rent. So that comparison is relevant when it comes to representing  the housing choice trade-off in clear cost terms.

Two years ago, that head-to-head heavily favored buying, thanks to very low mortgage rates and lower prices. Back then, more than three-quarters of the counties in the country saw lower buying costs than renting costs.

With prices and rates higher now, less than half of the counties in the country see math that favors buying.

But those raw numbers hide the fact that unlike a rent check, a percentage of every monthly mortgage payment—after the lender is paid interest—goes toward the owner’s home equity. That means it’s really a forced savings plan.

Over time, less of the mortgage payments go toward interest and more go toward equity, so the savings power is enhanced further.

Here’s how that works out for a median-price home of $250,000 bought in January with 20% down with a monthly payment of $976.

Before their first payment, the proud new homeowners had $50,000 in equity thanks to their down payment. (Actually, 20% down isn’t always typical or necessary, but, hey, it keeps this illustration simple.)

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In the first year, an average of 29% of the monthly payments builds equity. After 12 payments, the homeowners have just over $3,400 in added equity.

By year 14, 50% of the monthly $976 payment goes toward equity. Don’t forget that the monthly payment hasn’t changed, because the interest rate was fixed.

At the end of the 14th year, just shy of $64,000 has been added to the initial $50,000 in equity.

In the final year of the 30-year mortgage, while the monthly payment remains $976, 98% of the monthly payments builds equity until that magic day when the home is owned free and clear.

Think you can beat that with rents? Researchers at Harvard put it this way:

“While studies simulating the financial returns to owning and renting find that renting is often more likely to be beneficial, in practice renters rarely accumulate any wealth. In no small part this seems traceable to the difficulties households face in trying to save absent either a clear goal or an automatic savings mechanism.”

So, you want a better rent versus buy illustration? First, find a place to rent for no more than $976—the same as our mortgage payment example above. If you can rent for less, great. Will you be able to save that difference amounting to at least $3,400 in the first year? That would imply you can really pay only about $700 in rent to get the same savings effect.

If you can’t save $3,400 yourself by paying less in rent, ask the landlord if he’ll take a portion of your rent payments and set it aside for your rainy day fund.

Then ask the landlord if he’ll set your rent payment at today’s rate for the next 30 years. And before you close the deal, ask him to raise the rainy day share each year by 1% to 2% until year 30, when he’ll get only 2% of the rent payment.

Clearly, this would not be easy to do.

Even if the house only keeps pace with inflation over 30 years, which is a very conservative assumption, the forced savings inherent in a mortgage guarantees a homeowner is building wealth. A renter household has to be extremely diligent to amass the same savings that the good ol’ 30-year mortgage does automatically.


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Do You Know the Real Cost of Renting vs. Buying? [INFOGRAPHIC]

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Some Highlights:

  • Historically, the choice between renting or buying a home has been a close decision.
  • Looking at the percentage of income needed to rent a median-priced home today (30%), vs. the percentage needed to buy a median-priced home (15%), the choice becomes obvious.
  • Every market is different. Before you renew your lease again, find out if you could use your housing costs to own a home of your own!

Overall and practicality wise, owning a home is so much better than renting out. If ever you have decided in buying your own home this year, feel free to email me. Let me help you find the perfect home for you!


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Got Savings? How To Build A Down Payment For A Home In 1 Year, 3 Years, Or 5 Years

Thinking about buying a home in the near future? Whether it’s a home for sale in Kihei or Wailuku, you’ll need a solid savings fund to accomplish this goal. In addition to covering such expenses as closing costs, escrow, and initial payments on taxes and insurance, cash is necessary for a down payment on your mortgage.

Planning to have 20% of a home’s purchase price to use as your down payment is a smart move. It not only makes you a more attractive borrower to a lender, but it also makes you a more reliable buyer. The more money you put down, the less likely your financing (and your home purchase!) will fall through.

A 20% down payment is a great savings goal, but it’s also a lot of cash. Let’s say you want to buy a home that costs $250,000. You’ll need $50,000 in cash to put down. That’s no small number. But you can make it happen in the near future. Here’s how you can work to build a down payment in one year, three years, or five years.
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Raise a down payment in one year

If you target this goal, know upfront that you’ve given yourself a serious challenge. Building a savings fund of $50,000 in 12 months will require you to set aside $4,167 per month and take some extreme measures to make it happen. First, look at every single dollar you can cut from your current spending. Here are a few ways to aggressively trim your expenses.

Move in with a friend or family member to slash your rent. In addition, you could offer to do work around the house or help out in other ways to cut your rent further (or even live rent-free!).

Sell useful but not strictly necessary assets, like your car. You can also comb through all your possessions to determine what you could sell, from old collections to used textbooks to clothes and more. Consider consignment stores, online yard sales, and other ways to sell your stuff.

Get rid of every nonessential expense, no matter how inexpensive it may feel. That can include everything from services like Spotify and Netflix to discretionary spending like shopping or new tech.

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Downgrade essential services for cheaper options. Perhaps you can reduce your insurance coverage and drop the cost of your monthly premiums. Other places to consider: your cellphone plan and your groceries. Your new rule should be “If I don’t need to buy it, I won’t.” Remember, you need to bank $4,167 every month. Many people’s total monthly budgets don’t add up to the amount you’re trying to save!

Save for a down payment in three years

While it’s still an ambitious savings goal (you’ll need to save $1,389 per month), your approach won’t need to be quite as extreme. However, the basic steps remain the same: Cut unnecessary costs and look to increase your income so you have more cash to save. Here are a few ideas to help you eliminate expenses and immediately save hundreds per month.

Switch to a streaming service. The average cable bill costs about $100 per month. Most streaming services are less than $10 per month. This will give you a monthly savings of $90!

Reduce the number of meals out you buy each week. If a daily lunch costs you $10 but packing your own costs only $4, that adds up to a monthly savings of $180.

Eliminate expensive entertainment. Even one date night to the movies per month can put a dent in your efforts! Two tickets, sodas, and a large popcorn typically cost about $35. In comparison, a rental from a video kiosk (or your streaming service) that you can enjoy at home with microwave popcorn? Maybe $5.

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Cut back on your vices. Beer, wine, and cigarettes don’t come cheap. If you’re used to buying a bottle of wine and a six-pack at the store each week, you may be spending close to $65 per month on alcohol alone. Cut back to just once a month (try the no-spend weekend!), and you could be looking at a monthly savings of $45.

Work out at home. There are countless alternatives to a pricey gym membership, from fitness communities to printable workouts to YouTube videos and more. You can slim down both your body and your budget for a monthly savings of $60 per month.

Negotiate your bills. Call your service providers, insurance companies, and cellphone carriers and ask about lower-cost options. You can switch to a more basic service, request discounts, or consider cutting the service altogether. This can add up to a monthly savings of $50 or more!

Making the changes in this list could save you $455 per month, which means you’re down to finding about $1,000 in your cash flow to allocate to your down payment goal. Additional sacrifices could include cutting dinners out to only twice a month. It might mean walking or taking public transportation instead of grabbing an Uber. And it may mean simply not buying things you don’t actually need.

Giving yourself three years also lets you make sustainable and lasting strides with earning more. You can develop a side hustle and turn that into a strong income stream. Or you could work your way up at your current position to take on more responsibilities that come with higher pay.

Every time you earn a raise, get a bonus, or make extra income, contribute it straight to your savings fund for your $50,000 down payment. That will either allow you to reach your goal sooner or require you to cut back less in spending.

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Build your down payment in five years

This timeline gives you the most flexibility in saving your $50,000 down payment. You’ll need to save about $834 per month to meet this goal. It’s still a lot of money but completely doable if you’re willing to cut back in places you currently spend. Use the tips above to help you cut costs and free up more cash for your down payment.

You might also consider investing your down payment savings in a taxable brokerage account. With five years until you need the money, placing it in the market enables your money to work harder for you. But remember, all investments carry risk. Don’t take this approach if you’re uncomfortable with the fact that you may end up earning 5% or more — but you could also only break even or even lose money.

The biggest challenge in saving $834 per month for this length of time is staying focused. To help, create an automatic transfer from your checking to your savings each month so you know that money consistently moves to your down payment fund even if your attention sometimes wanders to other, nearer-term issues.

And of course, working on earning more during this time will help too. Just as you would if you shot for the three-year goal, you can work to make lasting, big-impact changes to your earnings. If you’re entrepreneurial, that might mean starting something on the side and slowly growing that to a full-time business that generates more revenue than your current gig. The possibilities are endless, and with five years, you have much more time to test different paths and figure out what works best for you.

When you have successfully saved up for your down payment, call me and let us get your dream home ready!


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Why Pre-Approval Should Be Your First Step

In many markets across the country, the number of buyers searching for their dream homes greatly outnumbers the amount of homes for sale. This has led to a competitive marketplace where buyers often need to stand out. One way to show you are serious about buying your dream home is to get pre-qualified or pre-approved for a mortgage before starting your search.

Even if you are in a market that is not as competitive, knowing your budget will give you the confidence of knowing if your dream home is within your reach. 

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Freddie Mac lays out the advantages of pre-approval in the My Home section of their website:

“It’s highly recommended that you work with your lender to get pre-approved before you begin house hunting. Pre-approval will tell you how much home you can afford and can help you move faster, and with greater confidence, in competitive markets.”

One of the many advantages of working with a local real estate professional is that many have relationships with lenders who will be able to help you with this process. Once you have selected a lender, you will need to fill out their loan application and provide them with important information regarding “your credit, debt, work history, down payment and residential history.” 

Freddie Mac describes the 4 Cs that help determine the amount you will be qualified to borrow:

  1. Capacity: Your current and future ability to make your payments
  2. Capital or cash reserves: The money, savings and investments you have that can be sold quickly for cash
  3. Collateral: The home, or type of home, that you would like to purchase
  4. Credit: Your history of paying bills and other debts on time

Getting pre-approved is one of many steps that will show home sellers that you are serious about buying, and it often helps speed up the process once your offer has been accepted.

Bottom Line

Many potential home buyers overestimate the down payment and credit scores needed to qualify for a mortgage today. If you are ready and willing to buy, you may be pleasantly surprised at your ability to do so as well.

In real estate, it pays to be informed in the process. Get your pre approval and let’s work on getting your dream home in a snap–I’ll be glad to help.


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6 Surprising Things That Can Stall Your Mortgage Approval

Your offer has been accepted on your dream home and you were pre-approved for a mortgage. Now it’s just a little more paperwork until you’re hosting your first BBQ, right? Not necessarily. Even one slip-up before closing can cause stressful delays. Watch out for common stumbling blocks that can stall your closing by following these six tips:

1. Avoid a big purchase or a new credit card

Right before you close, the lender will do a final check on outstanding debts and credit inquiries. Any new debt could present a problem, so hold off on buying new furniture or applying for a credit card while waiting to close.

“I tell people to be as boring as possible: Go home, don’t spend any money, just watch TV until I get you the keys,” says Brad L’Engle, a certified mortgage planner in Folsom, California. “I had a client take out a Mervyn’s credit card to save 10 percent on a $33 purchase, and that popped up during the approval process and delayed it,” he says.

Whatever it is you think you need, wait until after your closing to buy it.

2. Don’t change or leave your job (if possible)

Try to avoid any changes in your job status while waiting to close. If there are any, inform the lender right away. Judy Richardson, a realtor at Red Oak Realty in Oakland, California, recently represented a buyer who was pregnant and took her maternity leave early. “When the lender called to verify employment, her employer said she was on maternity leave.” The buyer ended up needing to obtain written confirmation from the employer that she would return following her maternity leave, and the escrow closed three days late.

“The regulations around the loan are very strict, so buyers should be extraordinarily diligent with everything regarding credit, banking and employment when escrow has yet to close,” Richardson says.

3. Think twice about appealing an appraisal that’s lower than the purchase price

Since the subprime mortgage crash of 2008, the recession and subsequent financial reforms, there is much tighter regulation of the apprareal-estate-investmentisal process. Gone are the days when homes automatically appraised for the purchase price offer. In a competitive market where many homes receive multiple offers, it’s not uncommon for the appraisal to come in lower than the winning offer.

“If the appraisal comes in low, you can appeal the appraisal or the parties can renegotiate the contract,” L’Engle says. Either of those options will require more paperwork and potential delays, however. Because an appeal involves paying for another appraisal and there are no guarantees of success, many buyers and sellers choose to negotiate the contract instead.

4. Closely monitor the status of agreed-upon repairs

Whether it’s a termite problem or a new water heater, repairs can cause delays if not negotiated and executed properly. Any repairs the seller agrees to complete must be done satisfactorily before the buyer and lender will close a deal. “Sometimes sellers and buyers will go back and forth for weeks about repairs to the property,” L’Engle says.  “If it was an issue flagged by an appraiser, now the appraiser has to go back out and verify that it’s been done.”

5. Avoid any open disputes on your credit report

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Lots of people find erroneous information on their credit reports and dispute it, but if you are applying for a mortgage, think twice. After you file a dispute, the creditor has 30 days to respond. Lenders usually won’t approve a mortgage until the dispute is removed.

Being proactive is the best way to avoid this problem: “It’s always important to run your credit annually so you can deal with fixing any credit issues prior to getting too deep into the process of looking for a home,” Richardson advises.

6. Be sure the title company checks for problems prior to escrow

Most of the time, the title company will uncover and resolve any outstanding liens or other problems with the title long before escrow. But if not, problems can arise. “If a title company does not pull a pre-escrow [report] prior to the property coming on the market, then a ‘surprise’ lien—even as small as a garbage lien—can cause delays,” Richardson says.

“I once had a transaction where a business lien was found on the seller side the day before closing,” she says. “Any lien needs to be addressed prior to close of escrow or the property will not transfer. These liens can take days or even months to clear.”

One more piece of advice: Slow it down

Brad L’Engle has one suggestion for all home buyers and their realtors: “In a tight housing market, many agents feel the only way they can get their client’s offer accepted is to close quicker. I try to tell people to write [the contract] for 45 days and give themselves a little bit of breathing room. What’s another two weeks? That way you will have a smoother, more relaxed transaction.”

Get approved on a mortgage before hunting for your dream home. When it’s all settled, give me a call and let’s get you started in living your Maui dream!