Without a house to sell>, first-time home buyers have had a field day in the depressed housing market. Until recently, anyway. A series of new rules, regulations and policies have changed the landscape, making buying that new home harder and more expensive.
Not long ago, first-time buyers accounted for 40% of home sales. Now they're down to 29% and falling, experts say, as first-time buyers confront a steady accumulation of rising fees, costs, and rates. This month, fees on most new mortgages will rise by up to 0.50%. In April, fees on small-down-payment mortgages, a first-time buyer favorite, will spike. Meanwhile, more lenders are requiring larger down payments, and new proposals from the Obama administration call for mortgages to become more expensive and limited in size.
The new fees and higher barriers to entry are all a response to the sweeping mortgage losses of the last several years. Banks and other lenders lost billions of dollars on subprime and other risky mortgages, and some must now buy back bad loans they sold to Fannie Mae and Freddie Mac. To cover those losses, banks and the agencies are raising fees on new mortgages, says Keith Gumbinger, a vice president at HSH Associates, which tracks the mortgage market. Also, from the perspective of lenders and the government, making it harder and more expensive to get a mortgage will deter or cull the riskiest borrowers and minimize defaults.
But taken in total, all this reform means the window of opportunity for first-time buyers may be closing. Home prices still seem to be near the bottom, mortgages are still cheap and, though they have increased over the past five months, interest rates are still low. Of course, there are still reasons to wait to buy: The changes to the mortgage market could depress home sales and prices further. But for those who don't want to wait, here are the new rules for first-time home buyers.
New rule: Put more money down.
Not because you'll have to -- it's still possible to make a down payment of less than 5% -- but because you want to. Insurance fees on the government-insured mortgages that require just 3.5% down have doubled in seven months, to up to 1.15% (as of April). On a 30-year, $300,000 mortgage, a buyer would pay $30,000 more in fees than if he had signed up for the mortgage in September. Also, between new lender requirements and cash-flush buyers, down payments have been rising since the last half of 2010 and now average 34% of the purchase price, according to the latest data by mortgage-data firm CoreLogic.
It's unlikely that a first-time home buyer can save so much money for a down payment, especially in high-priced markets like New York and San Francisco, says Cameron Findlay, chief economist at LendingTree.com, which tracks mortgage rates. Instead, first timers might need to consider alternative options to get cash, like grants offered by individual states. And most lenders still permit buyers to use cash gifts from family with a notarized letter from the donor stating that the money doesn't need to be paid back, says Gumbinger. Or, a buyer who's open to co-owning a home can sign up for a mortgage with a co-applicant who has extra cash to put down but wants a stake in the property.
New rule: Stay for a decade.
Not only are the days of flip-and-move long gone, but buying a house has become truly a long-term investment. In many cases, 10 years long, says Paul Bishop, vice president of research at the National Association of Realtors -- if buyers are hoping to make a profit or just break even. As mortgage fees rise, buyers have to recoup larger costs, which takes a longer time. Also, experts predict very slow growth in home prices over the next 10 years, which means it will take a long time before sellers can make a profit, says Findlay. Of course, buying a home may still make financial sense, but buyers' focus should shift from rising prices to building equity.
For first-time buyers, this means avoiding homes that require renovations, if it's possible -- it will only take longer to recoup the costs of a new kitchen or deck, says Findlay. Instead, stick to a home that requires few major projects, which builds equity with the passing of time. Also, a bigger down payment can cushion the blow for buyers who end up having to sell in a hurry, because it lessens the chances of owing more money on the home than it's worth should values drop.
New rule: Brace for competition.
Following the housing downturn, desperate sellers were often eager to accept an offer any offer. But now, first-time buyers looking for discounted prices may be disappointed. Over the past few months, investors, international buyers, and downsizing retirees have made a noticeable impact on the market, because they're paying with cash. In January, about 32% of purchases were made with all cash, up from 26% a year ago, according to the NAR. Sellers are often more inclined to accept these offers since they don't need to wait for a lender to approve financing, says Karen Trainor, managing broker at Weichert Realtors in Ashburn, Va.
To stand out, first-time buyers can present an offer with few contingencies, she says. At this point, given growing competition among buyers, there's little reason for a seller to work with someone who requests repairs or asks them to cover the closing costs. But offers from buyers who ask strictly for a home inspection and appraisal two requirements they shouldn't give up are more likely to get accepted than all-cash bids with a long list of requirements.