How to buy a home on a Budget

As the real estate sector's boom seems to be slowing down in certain areas, while still thriving in others can seem a bit confusing, especially for those who think it's just time to wait it out and for prices to fall. Unfortunately for most, this is not typical, even though most point towards the financial crisis as an example. Historically real estate prices don’t swing nor have a high standard deviation, in those rare situations like now it may just be the tail risk or extremes of the market.

Home buyers tend to think that properties are traded like stocks, a lot of times you will hear that people are just waiting for the market to bottom. However, this may just mean in reality that real estate agents may have to do open houses and be ok with 1-5 offers instead of 20, and buyers that stand on the sidelines may be standing for a while. Sure home prices are starting to come down a bit, but that's from when the investor bought the home last year for 400k, put $50k into the property and has placed it on the market for $650k. The investor may now have ‘lowered’ their price to $625k, thus making less profits, but I wouldn’t expect them to get desperate as investors know they can rent out the property and have the PITI covered. Investors made up about 18% of all mortgages in early 2022, vs historically 11%, thus one of the reasons why second homes and investment properties increased in lending costs in the 1st quarter of 2022.

During the financial crisis, it was more expensive to own than it was to rent. In a lot of regions, it's still more expensive to rent than it is to own, while other regions have cooled off a bit. While it seems the odds are against newbie homebuyers, there are still opportunities that may allow one to still purchase a home at still what are historic low rates, even though they were indeed lower just a few months ago.

Having mortgage education is most important to the customer. Knowing your ratios, payment and general cost by using a DTI calculator, you should have more confidence knowing what you may qualify for. Borrowers should also know that when you ask for ‘closing costs’, it will typically include costs that are standard with every other mortgage company. You may want to ask questions such as what rate is par? Par being the rate where the origination is $0. (Please note that brokers get paid generally 1 of 2 ways, either borrower paid or lender paid, which may include giving the customer a higher interest rate in lieu of cash up front fee to the consumer).

Then take that par rate and get every other lender you are inquiring with to use that as your base, but make sure it’s on the same day if possible as rates do change consistently. Also ask direct questions such as what is your origination, processing, or other fees that go directly to you. Then compare these costs amongst all the lenders you inquired with. This in my opinion is an ideal way to compare brokers, and don’t be afraid to ask who the end lender is.

No Origination Fee nor Processing Fee Mortgage?

Is a true no origination mortgage even possible? The answer is yes, it depends on the state, and mortgage program, however you may want to use a mortgage broker that uses wholesale lenders, and not direct lenders.

Your best bet may be to look for mortgage brokers that are ‘dual capacity’, such as at MortgageQuote.com. Dual capacity means the person is a licensed mortgage broker and real estate agent. Thus having the ability to charge on both ends. MortgageQuote.com also does not charge a processing fee, which can be costly.

Imagine, a mortgage loan with no loan origination fee nor a processing fee. The dual capacity agent may have the ability to get paid as a real estate agent from the seller. Now imagine what your APR will look like and how much you could save over time.

You will want to check section A and B of the Loan Estimate, as this tends to be the sections where processing and origination fees are shown. Make sure to review the whole loan estimate as well, as it is important.

Why Are Mortgage Brokers Important?

Less of a need to haggle anymore with the broker over pricing, as dual capacity allows the broker to get paid on either/both sides and be more efficient with the loan process. Therefore, this could free up thousands of dollars up front to buy that home that you may not have qualified for initially, or perhaps put back into the new home.

Dual capacity brokers and agents may have the ability to do this, however, it depends on the mortgage program (FHA does not allow this) and the lender as it may differ depending on the situation. You will have to sign additional disclosures for using a dual capacity agent, but this in general is just to inform you of the ability of getting paid from both sides.

Interest Rates, Does It Matter?

Interest rates can be your best friend regardless of where they are. When you purchase a property, the first thing you need to ask yourself before you close on your mortgage is, how long will you be there? Will you sell or refinance the property in X period of time? If so, this is a great way for your loan originator to Know-Your-Customer. For instance, what is the purpose of buying down your interest rate if you plan on selling the property in 2 years?

Perhaps it might be best to get the highest interest rate you qualify for as the lender may pay you in lieu for accepting that higher interest rate. Other words, on your Loan Estimate, it will tell you what the highest and lowest rate and fees are, use this to your advantage. Figure out the mortgage payment (P&I), then find the difference in payment between them. Take that monthly payment and divide it into the lender's credit, or cost to buy down the rate and see how many months it would take for you to break-even on the deal, granted this is not an exact science, however it gives you a general rule of thumb. If the difference in payment between par, and a higher interest rate is say $50 as an example. If the lender is willing to pay you $5,000 then you know the break even is about 100 months or about 8 ⅓ years. If your goal is to sell the property in 2 years then this might be something you may want to consider, of course discuss this with your mortgage loan originator as they know your situation better.

Also note that lenders' credits for accepting a higher interest rate may allow you to obtain the subject property if you haven’t saved enough money to put down on the property as well. Example would be if you have saved $20,000 and you need $25,000 to close, by accepting a higher interest rate you may be allowed to close on the property because you have accepted lenders credit.

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Mortgages Are Tools

Mortgage loans are just tools in one tool box to purchase a home, if rates were to ever lower there may be the ability to still refinance, perhaps even escaping mortgage insurance. One should always look at the total payment, not just the interest rate, as you need to ask yourself what is the ‘tool’ doing for you?

If you are a Veteran, you have the ability to have a 100% loan, minus of course closing costs and perhaps other fees such as termite and appraisal. VA loans tend to be extremely smooth and interest rates in my opinion are better than any other mortgage program out there.

A USDA loan has the ability to lend 100% LTC (loan-to-value) as well, granted only certain properties qualify for it, but why not just double check to see if the property qualifies as it might just get you into that home. You can check the USDA loan qualification by using real estate tools under Area Median Income.

An FHA Loan allows borrowers to borrow up to 96.5% LTV, while allowing for higher debt-to-income and some looser underwriting restrictions. You may also have the ability to get gift funds from family members to help purchase your first property.

Conventional loans also allow gift funds, but are generally not restricted to just direct family unlike FHA loans. Conventional loans generally also allow for second mortgages, so if you need a purchase money mortgage or even seller concessions you may be able to purchase the property. Remember mortgages are based on the lower of the purchase price or the appraised value, whichever is less.

Inflation, For Good Or Bad

While inflation may seem to be working against future homebuyers, it might just be your best friend as well. Homes tend to be a natural hedge for inflation. While all homes are some form of a commodity, and all commodities trade in USD, therefore you should be aware of the cost of construction, wages, lumber etc even if it is not a new home as this will guide you to where home prices may lean towards.

When the Fed raises interest rates, the US dollar also generally increases in value (DXY). This is because it is known as a ‘safe haven’ for currencies, as it allows governments to buy commodities at more known prices. When interest rates rise, the USD generally increases in value vs other currencies, therefore making US exports more expensive but you might be able to now buy that home in the south of France you always wanted to buy.

Sources

Buying Your First Home

The Essential Guide to Creating a Homebuying Budget