Is Now The Right Time To Buy And Get A Home Loan?
You May Need To Change Your Perception.
Last week I received a call from a client who posed a very valid question. “I have plenty of money, why is it so hard to get pre-approved?” Although this was a simple question, the answer is multi-faceted. Here are some of the reasons why it seems so hard to get a loan (even though it’s not if you change your perception).
Lenders got burned. To date, more than 2 million homes have gone into foreclosure since the housing crisis began. That means lenders (including Fannie Mae and Freddie Mac) have lost a lot of money so they are being incredibly selective about whom they will loan money to. Even borrowers with plenty of money are going to have to show up and do the paperwork. Outstanding debts, including credit cards and car payments, may need to be paid down. Any collections on credit reports need to be rectified and/or removed. You need to verify your down payment and income. This is a universal requirement for most lenders no matter how much of a down payment you have.
Lenders are adamant that all of your paperwork is in precise order or they risk having to buy the loan back from the investors (something lenders do not want to do). To get pre-approved today, you will need to pony up bank statements, proof of income, and documentation of any sources of income you may have (alimony, child support, money from a settlement, etc). Lenders will not qualify borrowers for a loan unless you have irrefutable proof that you can pay your mortgage.
With all those homes that have already been foreclosed on in the past 3 years, and an estimated 5-7 million more potentially being foreclosed on, shouldn’t banks be eager to rid their books of these foreclosed upon homes? Yes, banks do own a lot of homes currently and anticipate additional foreclosures but that doesn’t mean that they are actively trying to sell all of them. This seems counter intuitive but there are legitimate reasons for this.
In short, if banks were to flood the market with homes, home values would likely drop substantially. In addition, if banks released all of the homes on “their books,” there is a high probability that some of the banks would become insolvent and that’s definitely not going to help with economic recovery. (This is why banks are slowly selling the homes they foreclose on in order to manage their losses).
By the time I had explained all of this to my client, he found himself wondering aloud if it’s the right time to buy a house. The answer to this was simple. Yes! It may not be the best time to try to buy and flip a house. It may not be the best time to buy a temporary home. However, if you’re planning to live in a home for at least five years, it’s a terrific time to buy the perfect home to live in and enjoy. Notice I said the perfect home not the perfect deal. Let me explain.
Because so many home owners are desperate to get a loan modification, the inventory of homes is sparse. Those homes that would otherwise be in foreclosure and/or listed as short sale are not. This increases competition over the homes for sale and you may not get that once in a lifetime lowball deal you’re looking for. Instead, what you’ll find is that many homes that would normally sell for a premium in a normal market are not selling at a premium. Money was loose 3-5 years ago and many homeowners obtained loans up to 125% of the (inflated) value. This money was frequently spent on lavish backyards, custom pools, designer kitchens and other upgraded amenities. These homes are now for sale but without the huge premiums. In addition, homes with larger than normal yards and homes on premium lots (terrific views) are selling for current market value and not for a premium. All that said, you are in a terrific position to find a unique home or a home with a special feature that really appeals to you and your family at a great price.
Also, consider that rates are low but will probably continue to increase in small increments over the next few years. Values are likely to remain soft for the foreseeable future due to the anticipated number of foreclosures in the previous years. However, anytime you’re looking for a home to live in, to enjoy, and to think of as more than just a financial investment, it is the right time to buy.
Obtaining a loan today requires more work from the borrower than it once did but it’s not impossible, nor should the extra footwork deter you from buying your dream home. When you are ready to buy your first home, or move up into a different home, the only question you need to ask yourself is: “Is this the right home for me?” If the answer is unequivocally yes, then no amount of extra work or fear of tiny variations in interest rates or values should keep you from going after it with gusto.
