REAL ESTATE

Should I Assume?

As discussed in Chapter 7 of our publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology, and our Real Estate – Do I Buy? blog, dated 4-15-24, the purchase a home may be one of the biggest decisions to make in one’s lifetime. For first time buyers, which are usually in their late 20’s to early 30’s, the process can be very harrowing and nerve-wracking.

     As also noted in our recent Real Estate – Is It Time? Blog, dated 6-15-24 (please review for details regarding the current status of multi-family, condominium, and commercial real estate), recent housing market conditions, that have not favored the buyer, but may finally be starting to change. Residential housing prices have started moving slightly downward in many locations, as inventories have started to rise. Although some “bidding wars” continue for certain desirable homes and locations, the fierce competition has cooled, in some areas, due to a percentage of buyers being “priced out” of homes, and/or simply waiting for better value, creating much less demand.

     One main reason for the increase in inventories, unfortunately, is the surging number of mortgage loan defaults over the past several months. The over-paying/over-bidding is starting to catch up to some buyers who over-extended themselves financially. The rising property taxes, which was expected, as homes are now appraised higher due to the inflated prices caused by over-bidding, is another negative factor for the aspiring home buyer. The ensuing price decreases (many more property owners are reducing prices when their homes won’t sell) in many areas should create more affordability, but make sure to confirm when the last property tax hike occurred. As mentioned in our publication, it is not wise to forego inspections or appraisals, just to overpay for a home (if you can help it). As prices come down, and original list prices get reduced, negotiations will be possible again. Recent reports have also revealed that new mortgage applications have decreased, as well as housing starts (generated by homebuilder permits), which supports the decrease in prices over the last few months. The latest report for housing starts, as we prepare this blog, ticked up just slightly, mainly due to more construction of multi-family properties, as single family homes remained down.    

     Although current conditions continue to favor “all cash” buyers, as they are unaffected by the interest rates (remaining high), lending remains very tight for new buyers. The fact that the prices of homes have also outpaced personal wages by 3-5X does not help. There are alternatives to consider including foreclosures, short-sales, and rehabs, however those types of homes are difficult to get your hands on.

     One interesting (and maybe easier) route to seek is the assumable mortgage. Certain types of mortgages can be “assumed” (or transferred) from the existing mortgagee/home owner, including most Federal Housing Administration (FHA), Veterans Affairs (VA), and Dept. of Agriculture (USDA) loans. Conventional loans from Freddie Mac and Fannie Mae are normally not assumable. Although they also are not easy to find, especially outside the “family and friends” sphere, a real estate agent should be aware if a home they list, or visit, has an assumable mortgage. Advantages to taking over an existing mortgage includes the potential for a significantly lower interest rate than the current prime rate, lower closing costs, and quicker closings, as no “new” application is necessary. Loans still need to be approved for the new buyer, by the lender, however, as the new buyer is required to qualify with their own finances. Good credit, steady employment, low debt, and possible down payment will determine affordability as always. Potential negatives to assuming a mortgage includes finding one in the first place (not always easy), and the down payment that may be required by the seller dependent upon the amount of equity in the property. There is also a “release of liability” form that will be submitted by the seller to complete the loan, which will make the new owner 100% responsible for the home once the closing occurs. Remember to have a complete inspection and appraisal performed to protect your interest. Overall, assumable mortgages can be very beneficial if you can get your hands on one.

Additionally, be careful for mortgage programs that seem too good to be true. Some lenders have brought back mortgages known as “zombie” or “piggyback” (80/20) loans that were prominent in the last real estate crisis. Some of these loans allow for zero money down, with 80% of the home loan covered in a first mortgage, and the remaining 20% attributed to a second mortgage, to cover the down payment, normally at a higher rate of interest. There are positive and negatives to this type of loan, however, one of the main negatives includes the fact that each mortgage can be foreclosed by the lender separately, which is dangerous.

      Those who plan to settle into a single-family home for decades, and have sufficient down payments, should pay more attention to the price of the home (which will never change), the property taxes, and home owner’s insurance (which have recently increased as noted), rather than just the interest rate (which often changes). Homes can always be refinanced when interest rates decline. A buyer should also make sure they have about 6 months in savings remaining to cover the mortgage and expenses in the event of an unforeseen emergency.

      Current conditions continue to be challenging for those who are desiring a “starter” home, or are only looking for the short-term purchase. Always confer with your financial advisor and an experienced agent prior to making this important decision.

      Please visit the website www.augustassociatesllc.com for home values, listings, and professional assistance.