Many people who have yet to go through the mortgage application and underwriting process in recent years have heard horror stories about the lack of funds available, and perhaps think the worst. Potential borrowers might not realize that ample buyer opportunity exists to get financing to buy a new home.
Thirty years ago, the 30-year fixed rate was 12 percent — and reached 18.45 percent in 1982. I had the inauspicious opportunity to begin my career in real estate during this period. Imagine trying to get a first time buyer to sign a purchase offer when the special, below market financing being offered was a 12% one year adjustable rate mortgage.
Compare that to today, when rates can be lower than 5 percent for a FIXED 30-year mortgage. Even in the past decade, average rates have not exceeded 7 percent for a significant length of time. In other words, considering where rates are now, borrowers’ qualifying dollars can go considerably further than where borrowers’ dollars went in past decades.
Buyer Opportunity with small down payments
Moreover, even in what is considered today’s tight credit market, borrowers can obtain financing with as little as 3.50 percent down with a Federal Housing Administration (FHA) loan. And imagine, 100% financing is available with a U.S. Department of Agriculture Rural Development or U.S. Department of Veterans Affairs (VA) mortgage, subject to qualification. Pricing and criteria for conventional financing is easing up, as well. And borrowers today can shop online — their parents could not.
Automated underwriting also has revolutionized the industry and has made the approval process more responsive to the needs of today’s borrowers. Many lenders will allow for a high back-end ratio as defined by Loan Prospector or Desktop Underwriter — or the calculation of monthly debt compared to gross income — higher than published guidelines. As of this moment, some automated findings allow for a back-end ratio as high as 55 percent, though it might not be feasible for all borrowers.
All in all, the market for financing real property, your new home is favorable. With prices for those potential new homes down for the moment, it could actually be ideal.