home buyer

28Dec202128Dec2021

20% Down Payment Myth

elieliresidentialcom Arlington, Buyer, Loan Condo, home buyer, Insurace, Market, mortgage, Real Estate 0 Comment

Question: Are there ways to buy a home without putting 20% down?

Answer: I hope everybody is enjoying the holidays and some time off!

Next month we will take some time to look at market performance in 2021, but this week I’ll address one of the most common questions I get – is it necessary to save 20% for a down payment in order to buy a home? Studies show that the most common reason people give for not buying a home is not having enough savings for a down payment.

About 1/3 of Arlington buyers purchase a home with less than 20% down and for many buyers, especially first-time home buyers, they’re putting as little as 3-5% down.

Programs For Everybody

For those with good credit, there are popular Conventional Loan programs allowing for as little as 3% down and for those with lower credit scores, FHA Loan programs range from 3.5%-10% down. There are also some exceptional 10-15% down programs available to those with great credit and good incomes that do not include mortgage insurance premiums.

Specialty Programs For Military and Doctors

If you are an active-duty or former servicemember you likely know about VA Loans that allow purchases with zero down. Doctors also have access to special loan programs offering great rates with low down payments for large loan amounts.

Mortgage Insurance

Many loans with less than 20% down will include mortgage insurance, which I wrote about here. It will increase your monthly payment and is usually a higher the less you put down. However, there are options to get rid of the mortgage insurance fees by buying it out or applying for early removal after a couple of years.

There are also loan options that do not include mortgage insurance at all.

Impact on Negotiations

Clients often ask me if a lower down payment will impact their ability to negotiate, so in 2018 I did an analysis on the topic. The results showed that only cash buyers (100% down) and buyers not putting any money down were materially impacted by their down payment, the negotiation leverage was similar for everybody in between.

However, it would be misleading to suggest that down payment percentage doesn’t have any effect. Most sellers will respond more enthusiastically to higher down payments, and this comes into play in competitive scenarios (multiple offers), which are common in Arlington and the surrounding DC Metro neighborhoods. When sellers are choosing between multiple, similar offers, buyers with higher down payments have an advantage.

Buyers can combat the potential negative impact of a lower down payment in multiple offer scenarios by getting a strong pre-approval letter from a reputable local lender, offering to get pre-approved by a lender of the seller’s choosing, increasing the Earnest Money Deposit, or several other tweaks to the contract that will be looked at favorably by the seller.

Favorite Mortgage Programs

If you’d like any additional information or recommendations on lenders or loan programs, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

08Jun202108Jun2021

Are Buyers Really Waiving Inspections? The Many Approaches to Home Inspections

elieliresidentialcom Arlington, Buyer home buyer, Home Buyers, Home Inspection, inspection 1 Comment

Question: What are the different ways of structuring a Home Inspection Contingency and how do they affect the odds of my offer being accepted?

Answer:

Last Week’s $1,000 Donation Poll

Before I jump into today’s column, I want to announce that based on last week’s vote, our team donated $1,000 to the Fisher House Foundation on behalf of the ARLnow community in honor of Memorial Day. Fisher House Foundation builds comfort homes where military & veteran families can stay free of charge, while a loved one is in the hospital. Thank you to everybody who voted and commented with feedback about the various charities.

Home Inspection Contingency Overview

Not only is this market pushing Buyers to offer well over asking price, it’s also pushing them to take on a lot of risk by reducing or eliminating the protections offered by standard contingencies: Inspection, Financing, and Appraisal Contingencies are the “Big Three.”

Of the “Big Three” contingencies, the Home Inspection Contingency represents the most risk to a Seller because it gives the buyer a nearly unilateral option of voiding and/or the ability to request Seller repairs or Seller credits based on the findings of the inspection. Thus, Buyers who reduce or eliminate the risk of a Home Inspection Contingency to a Seller are viewed much more favorably than Buyers who do not.

A home inspection is when a Buyer hires a licensed Home Inspector to provide a report on the condition of a home. They examine and test things like appliances, the roof, water drainage, and the electrical system to help Buyers understand what they’re buying. Depending on the size and age of a property, inspections generally cost anywhere from ~$300-$800+ before common add-ons like radon tests and chimney inspections.

If you’re buying a home, there are a few different ways of approaching the home inspection.

Home Inspection with Right to Void or Negotiate Repairs and/or Credits

This option is most favorable for Buyers and least favorable to Sellers because it allows the Buyer to void the contract (and get their Earnest Money Deposit back) if they don’t like the results of the inspection (or even if they just get cold feet) and also allows Buyers to make any requests they want for Seller repairs or Seller credits.

If a Buyer decides to void, there’s nothing the Seller can do, as long as the Notice to Void is issued within the proper window of time. Buyers can make any requests they want of the Seller for repairs and credits, but the Seller can also negotiate or reject whatever requests they want. If the Buyer and Seller are unable to reach an agreement on repairs and/or credits within a specified number of days, the Buyer has the option of accepting the Seller’s latest offer for repairs and/or credits or voiding the contract.

Most people would consider this the standard/default type of inspection, but in hot markets like we’re experiencing now, this structure is much less common.

Home Inspection with Right to Void Only

Also known as a Pass/Fail inspection. This option is less favorable to Buyers and thus, better for Sellers. In this scenario, Buyers retain their ability to void the contract after doing the home inspection, but give up the negotiation period to request repairs or credits from the Seller.

The idea behind this inspection structure is to communicate to the Seller that the Buyer just wants to ensure there are no major issues, but is willing to take on the cost/burden of smaller issues. Of course, there’s nothing stopping the Buyer and Seller from agreeing to repairs or credits within this structure, and it happens more often than you might think. This is especially true if a larger issue is discovered that is a surprise to both parties such as water penetration or a cracked foundation.

In many cases, the timeline that Buyers have to complete their inspection and make a decision to void or not is much faster than a “full” inspection, which is another benefit to the Seller. If the contract is going to be canceled, Sellers want that to happen sooner than later.

Pre-Inspection

In this scenario, the Buyer does their home inspection before making an offer. It allows the Buyer to make a significantly more appealing offer to the Seller because it does not include a Home Inspection Contingency (no right to void based on the inspection), while giving the Buyer all the benefits of being informed by a complete home inspection.

The biggest downside to this approach is that Buyers are paying for a home inspection before they know whether or not their offer will be accepted so Buyers can pay hundreds of dollars and spend 2-3+ hours at an inspection for a house that they get significantly outbid on. In many cases I’ve experienced with hot homes, multiple buyers are doing pre-inspections. I recall a house in Arlington in early 2020 that had something like 20 pre-inspection done!

This approach is not always an option because there may not be enough time to schedule a pre-inspection before the Seller is reviewing offers or the Seller may not allow pre-inspections because they take up large chunks of time and get in the way of other Buyers seeing the property.

No Inspection or Info-Only Inspection

Unfortunately, the market has gotten so competitive that many Buyers are purchasing homes without doing a home inspection or doing one for informational purposes only, whereby the inspection is done after an offer is accepted without any contractual ability to void, thus risking the (likely high) Earnest Money Deposit if the results of the inspection are bad enough to warrant terminating the deal.

This is a particularly unhealthy place for the market to be because it transfers a massive amount of risk onto Buyers who choose to commit their deposit without any due diligence or makes it very difficult for Buyers who refuse to take on that type of risk to actually buy a home.

What Should We Do?

While I doubt it will ever happen, I’d like to see the state or our Realtor Associations introduce a basic/minimum inspection requirement for homes being sold to non-builders/contractors/investors (like the “accredited investor” threshold that the SEC has for certain investments).

This would mean that in a hot market where Buyers are being pressured not to do a home inspection, Sellers would pay a relatively small amount ($200-$300) for an inspection report on the core systems of the home to be conducted by a licensed Inspector, with that report available prior to offers being made or after accepting an offer, but with a short review period that includes a right to void (like the required HOA/Condo document review period).

The best advice I can give is that it’s important to understand the risk-reward balance of any decision you make in real estate, especially as it relates to structuring or removing the Home Inspection Contingency.

27Oct2020

Advice on Home Inspection Negotiations

elieliresidentialcom Arlington, Buyer home buyer, home buying, Home Inspection, inspection, negotiations 0 Comment

Question: We just finished out home inspection and are a bit overwhelmed by the list of recommended repairs. How do we know what to ask for and what’s reasonable to expect from the seller?

Answer: As we head into the colder months and the market slows down a bit, buyers will start picking up more leverage to include home inspection contingencies with the right to negotiate, not just the right to void. I thought it would be helpful timing to revisit some tips, applicable for buyers and sellers, on home inspection negotiations.

Inspection negotiations can be frustrating for both parties so it’s helpful to establish some ground-rules heading into negotiations. Unless you’re buying a new home, you should expect the inspection to turn up at least a handful of items and you’ll need to quickly and reasonably determine which items are the responsibility of the seller or buyer.

What Is A Home Inspection?

After ratifying (signed by both parties) a contract to purchase a home, most buyers will hire a home inspector to inspect the entire home and produce a report of any issues/risks, from foundation cracks to missing door stops.

Depending on the contract terms, the buyer usually has the right to negotiate for repairs or credits, based on the results of the inspection, and the right to void if an agreement can’t be reached OR no negotiation period, just a right to void (aka a Pass/Fail Inspection). In either case, if the buyer voids under the terms of the inspection contingency, they will receive their full deposit back.

What Should You Look For?

In my opinion, the goal of an inspection is to ensure that the property is in the condition both sides expected while negotiating the purchase price. Items that have a material impact on the value of the home should be on the table for negotiation.

Generally, you can divide findings into big-ticket items that impact the value of the home and must be addressed and smaller punch-list items that are good housekeeping practices. The big-ticket items I look for during an inspection are:

Structural Flaws
Water Penetration
Safety Hazards
Inoperability (e.g. AC not working)

System Life Expectancy

You should also determine the age of major systems like the roof, windows, appliances, HVAC, and water heater prior to making your offer, and verify these are accurate during the inspection. Make sure you’re clear on the projected life expectancy of these systems while you’re negotiating the purchase price and factor this information into your offer. You’ll have a tough time convincing most sellers they’re on the hook for crediting you the cost of a 17-year-old water heater if that information was made available prior to your offer, assuming the system is working.

What Can You Ask For?

Negotiations can include all sorts of solutions, but most frequently the conversation is about whether a seller will handle the repairs or provide the buyer a credit (against closing costs) instead. Often times an inspection agreement includes both – a credit for some items and a request to fix/replace others. Sellers must use licensed contractors and provide works receipts for any work they do.

In general, if something you’re asking for involves personal preference or you want to have control over the quality of the result, it’s best to ask for a credit and handle it yourself. For example, if the deck is falling apart and needs to be replaced, you don’t want the seller managing the design and construction of a new deck so ask for a credit for the replacement cost and make sure you’re getting the deck you want.

Inspections Don’t Need To Be Contentious

Inspections are one of the most common points of contention between buyers and sellers, but with the right preparation and expectations going in, it can be a smooth process that both sides are happy with. Like the negotiations you had on the sale contract, the inspection period is also a negotiation that requires both parties to be understanding and reasonable to reach a win/win.

14Jan202014Jan2020

2020+ Interest Rate Predictions

elieliresidentialcom Arlington, Buyer, Loan home buyer, home loans, interest, interest rates, Loans, rates 1 Comment

Question: Do you expect interest rates to remain low in 2020?

Answer: Mortgage rates increased sharply in 2018, peaking at 7+ year highs in the fall of 2018, and most experts expected that trend to continue into 2019 and for 30yr rates to clear the 5% mark for the first time since spring 2010. However, changes in economic policy and financial markets pushed rates down at the end of 2018 and throughout 2019, coming close to all-time lows in the 2^nd half of 2019.

Average 30yr Fixed Mortgage Rate Since 1971

Average 30yr Fixed Mortgage Rate Since 2010

Rates in 2020+

The Mortgage Bankers Association and Freddie Mac each predict that rates will remain low, right around current levels, through 2021 with an average 30yr Fixed Rate hovering around 3.7-3.8% through that period. The Mortgage Bankers Association predicts that rates won’t start increasing until 2022, when they’re predicting the average rate to increase modestly to 4.1%.

If these projections are accurate, it should support strong price growth over the next few years in Arlington, Northern VA, and the greater DC Metro.

However, keep in mind that just over 12 months ago, most experts predicted that mortgage rates would be over 5% by 2020 and, according to Freddie Mac, the average 30yr Fixed Rate last week was 3.64%. Changes in the global or US economy, the election, and the stock market can all change the course of rates in 2020 and beyond.

Lender Advice

If you’re considering purchasing in 2020, I wrote a column a few years ago about the value of a good lender that I’d encourage you to review. If you’d like to talk to somebody, I suggest reaching out to Jake Ryon of First Home Mortgage at JRyon@firsthome.com.

If you’d like to meet to discuss buying or selling in the area, don’t hesitate to reach out to me at Eli@EliResidential.com.

01Oct2019

The 20% Down Payment Myth

judson726 Buyer, Loan down payment, home buyer, home buying, home loan, lenders 0 Comment

Question: Is it possible to buy a home with less than 20% down?

Answer: I’m always surprised by the number of people who assume they have to put 20% down to buy a home and delay their goal of becoming a homeowner for years because of it. Studies show that the most common reason people give for not buying a home is that they don’t have enough for a down payment.

In reality, about 1/3 of Arlington buyers purchase a home with less than 20% down and for many buyers, especially first-time home buyers, they’re putting as little as 3-5% down.