Market for Jumbo Loans Thaws (a Bit)
The weakest part of the housing market right now is the upper end -- specifically, homes in the upper six figures and above.
Why?
The soft economy, the stock market, 9.4% unemployment (make that 9.7% as of Fri.).
However, arguably an even bigger factor is financing.
Two Mortgage Markets
All you really need to know about mortgages at the moment is one number: $417,000.
That's the ceiling (at least in most parts of the country) for what's called a "conforming" mortgage.
Conforming mortgages are insured by the U.S. government, and therefore are considered safe.
"Jumbo" mortgages above $417k are not insured, and therefore are considered much riskier.
Jumbo Mortgage, Jumbo Risk?
To protect themselves, jumbo lenders typically require both a higher interest rate -- as much as 1.5% above conforming loans -- and a much higher down payment.
Whereas home buyers using conforming mortgages can get by with down payments as small as 5%, depending on their profile, "jumbo" lenders can require as much as 30% down.
How significant is that?
Huge.
On a $400k home, a Buyer with strong credit could conceivably put down as little as $20k, or 5%.
On a $1M home, a 25% down payment comes to . . . a cool $250k.
From "All or Nothing" to "Trade-Off's"
Since mid-Summer, there are some signs that the jumbo market is evolving from an "all or nothing" proposition to something more nuanced.
So, at least some lenders are willing to relax their down payment requirements in exchange for a higher interest rate.
Other lenders are differentiating more amongst borrowers based on their credit scores, offering lower rates to the strongest borrowers.
Too, lenders are increasingly willing to "staple" a conforming mortgage to a second, non-conforming mortgage.
All of the foregoing are helping to thaw the market for upper bracket homes.
Now, if only the economy cooperates . . .
Showing posts with label conforming loan. Show all posts
Showing posts with label conforming loan. Show all posts
Wednesday, September 2, 2009
Wednesday, July 15, 2009
The "It's-All-I-Can-Afford" Offer
Buyer's Budget as Negotiating Leverage
I'm seeing and hearing more instances of Buyers, in the course of negotiating for a home, instruct their Realtors (including, sometimes, me!) to tell the Seller that "that's all I can afford."
Is that a smart tactic?
I discourage it, for three reasons.
One. Sellers tend not to believe such representations.
The only way to really prove that the Buyer's offer is 100% of their budget is to put the Seller in touch with the Buyer's lender, then authorize the lender to share confidential information.
Most Buyers, understandably, would be reluctant to do that.
Instead, the convention has developed for lenders to generate a pre-approval letter verifying that the home in question is within the Buyer's budget.
Two. A home's fair market value and a Buyer's budget aren't related.
Whether Bill Gates or Joe Middle Class is the prospective Buyer, a home's value is still the same: whatever the "comp's" say it is. That is, how much the three most similar, nearby homes fetched, most recently. Period.
That's how Realtors assign value. It's how appraisers determine value. And that's how the Seller's expectations will be framed.
Put it this way: imagine your reaction if the Seller raised their price because you could afford to pay more.
(Can this be a factor in negotiations? You 'betcha. How much do you want to wager that ex-Green Bay quarterback Brett Favre, who's reportedly house-hunting locally, is buying through a corporation or other third party?)
Three. It can spook Sellers.
Signaling that the Buyer is at the very top of their budget can just as easily make a Seller skip the deal as bring them to heel.
That's because any hiccup -- like a jump in interest rates, or the home not appraising -- can derail the sale.
In fact, when I represent Sellers, one of my favorite questions to ask the Buyer's lender (yes, I always call) is how "stretched" or "comfortable" the Buyer is buying the home in question.
Hearing that "it's a close call" would hardly be confidence-inspiring.
Better Tack
Instead of putting a spotlight on the Buyer's finances -- except to establish that they're qualified -- I've found that a better tactic is to focus on value.
Specifically, to make the case that, based on the home's location, features, condition, etc., the Buyer's offer represents fair market value. If not more.
And rattle off all the competing, nearby homes for sale and how they (favorably) compare (assuming that that's true; if not, it can boomerang).
As a general proposition, home sellers usually accept the price they think is the highest they're going to get -- not the highest they believe any particular Buyer can afford to pay.
P.S.: One exception to the foregoing can be when the home's price starts to move out of the range that can be financed with a "conforming" loan (up to $417k). Above that, Buyers need a jumbo loan, which is both much more expensive, and harder to obtain.
I'm seeing and hearing more instances of Buyers, in the course of negotiating for a home, instruct their Realtors (including, sometimes, me!) to tell the Seller that "that's all I can afford."
Is that a smart tactic?
I discourage it, for three reasons.
One. Sellers tend not to believe such representations.
The only way to really prove that the Buyer's offer is 100% of their budget is to put the Seller in touch with the Buyer's lender, then authorize the lender to share confidential information.
Most Buyers, understandably, would be reluctant to do that.
Instead, the convention has developed for lenders to generate a pre-approval letter verifying that the home in question is within the Buyer's budget.
Two. A home's fair market value and a Buyer's budget aren't related.
Whether Bill Gates or Joe Middle Class is the prospective Buyer, a home's value is still the same: whatever the "comp's" say it is. That is, how much the three most similar, nearby homes fetched, most recently. Period.
That's how Realtors assign value. It's how appraisers determine value. And that's how the Seller's expectations will be framed.
Put it this way: imagine your reaction if the Seller raised their price because you could afford to pay more.
(Can this be a factor in negotiations? You 'betcha. How much do you want to wager that ex-Green Bay quarterback Brett Favre, who's reportedly house-hunting locally, is buying through a corporation or other third party?)
Three. It can spook Sellers.
Signaling that the Buyer is at the very top of their budget can just as easily make a Seller skip the deal as bring them to heel.
That's because any hiccup -- like a jump in interest rates, or the home not appraising -- can derail the sale.
In fact, when I represent Sellers, one of my favorite questions to ask the Buyer's lender (yes, I always call) is how "stretched" or "comfortable" the Buyer is buying the home in question.
Hearing that "it's a close call" would hardly be confidence-inspiring.
Better Tack
Instead of putting a spotlight on the Buyer's finances -- except to establish that they're qualified -- I've found that a better tactic is to focus on value.
Specifically, to make the case that, based on the home's location, features, condition, etc., the Buyer's offer represents fair market value. If not more.
And rattle off all the competing, nearby homes for sale and how they (favorably) compare (assuming that that's true; if not, it can boomerang).
As a general proposition, home sellers usually accept the price they think is the highest they're going to get -- not the highest they believe any particular Buyer can afford to pay.
P.S.: One exception to the foregoing can be when the home's price starts to move out of the range that can be financed with a "conforming" loan (up to $417k). Above that, Buyers need a jumbo loan, which is both much more expensive, and harder to obtain.
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