An Economist’s 3 Tips for Spring Home Buying in a Sellers’ Market

In many parts of the country (OK, not Boston), the busy spring home-buying season is already underway—March typically ushers in a significant increase in home searches online. This year, even more people than last year are jumping into the search process as a result of improving financial circumstances, like a new job, or life events, like a new baby.

That said, many users of this website report that it’s still difficult to find a home that fits their needs and budget. That means this process may take longer than you expect. So, like the Fed keeps telling us, be patient. And be prepared.

1. Consider your alternatives

Mortgage rates are low for now, but they’ll be moving up, and likely remain volatile, in the months ahead. In any case, the average interest rate you see in the news is not necessarily the rate that will apply to you.

The specific rate you get is a product of several factors, including the lender, the loan type, when you applied, the home and its location, the nature of the purchase, and, of course, your credit history and financial circumstances.

What you can afford to buy is significantly affected by the specific mortgage options available to you. A 10-basis-point difference on a mortgage rate has a 1.2% impact on your monthly payment, so what seems like a minor difference from one rate to another can really add up. Plus, if you can’t afford a 20% down payment, you’ll also face mortgage insurance premiums that get added to the monthly payment.

Due to recent changes by housing agencies, you now have more options for low-down-payment programs and even lower mortgage insurance premiums than were available just a few months ago. But that also means you need to think through what is best for you and your circumstances. Our Mortgage 101 crash course is an excellent way to quickly learn the basics about mortgages.

2. Consider new construction

If you are shopping in an area where new homes are being built, don’t assume a brand-new home is out of your price range. While new-home prices have indeed increased at a faster rate than existing-home prices in recent years, that’s partly because low demand from first-time buyers encouraged builders to feature bigger and more expensive homes. In some parts of the country, we are seeing builders open up more affordable communities.

For example, in markets like the greater Cincinnati; Chicago; Washington, DC; andRaleigh, NC, areas, substantial portions of new homes for sale are within budget for households earning the median income for the area.

Having a new home built for you is one way to solve the problem of not being able to find a home on the market that fits your needs. That’s exactly what I did 20 years ago when I bought my first home.

3. Consider an expert local Realtor

The single best piece of advice I can give anyone looking to buy a home is simple: Find anexpert local Realtor® to help you through the home-buying journey. All three of those words are important.

When I say “expert,” I mean a professional with substantial experience and insight. This is critical to helping you find the right neighborhood and home, negotiating the best deal for you, and completing the process as smoothly as possible.

“Local” means someone who knows your real estate market, neighborhood, and streets intimately.

And finally, “Realtor” should not be taken for granted as just another name for a real estate agent. A Realtor is a real estate professional who is a member of the National Association of Realtors® and subscribes to its strict code of ethics. That standard of professionalism is important.

Congratulations on making it to this point! You may have weathered an economic storm, but now you’re able to consider buying a home. Buying a home is a journey, but if you follow these tips, you’ll be well on your way.

As chief economist of realtor.com®, Jonathan Smoke leads its efforts to develop and translate real estate data and trends into accurate and relevant consumer and industry insights on housing.

Sweet and Low: Why Aren’t More Buyers Putting Down 3%?

Where you put down roots says a lot about you. Suburb vs. city; condo vs. single-family house—these are all decisions that home buyers tackle, and what they decide speaks to who they are. Also telling is how much they can afford to put down on that house.

It seems that as the housing market corrects, buyers are increasingly opting to put down more money despite programs touting the opposite.

RealtyTrac, a real-estate industry data provider, analyzed down payments of nearly 20 million home purchase loans from 2004 to 2014 and found that today’s postrecession buyers have cash reserves and don’t really need low-down-payment loans to buy.

In fact, just 25% of buyers in 2014 put down 3% or less using an FHA or conventional loan combined with down payment assistance, according to the report. That may seem like a significant percentage—a full quarter of buyers!—but it’s the lowest rate in a decade. Low-down-payment loans peaked in 2009, taking 46% of market share, according to the report. Since then, they have been steadily losing favor—and for good reason.

Low-down-payment loans tend to be more expensive. FHA loans have upfront fees, as well as monthly mortgage insurance premiums. And in a climate of consistently low interest rates, low-down-payment loans tend to carry a higher-than-average rate. As the credit market tightened, banks turned their favor to only the most highly qualified applicants.

Last year, the average repeat home buyer was a married couple with a median household income of $95,000, according to the National Association of Realtors®’ annual profile of home buyers and sellers. These move-up buyers can sell their homes and use the profit to make a larger down payment.

While this might sound like the perfect home-buying cycle, it tends to leave out single people and first-time buyers—groups that traditionally have lower incomes and less savings. To be sure, the level of first-time buyers has shrunk to 30% in 2014 from 40% before the housing market collapse, according to NAR.

That may also have something to do with tighter lending restrictions. Only the most highly qualified buyers are being approved for loans. Last month, for instance, the average home buyer had a 731 FICO credit score, according to Jonathan Smoke, chief economist atrealtor.com. For conventional loans, the average home buyer had a 751 FICO, while for FHA loans it was 682.

Translation: The mortgage market has basically been skimming from the top.

Even though Fannie Mae and Freddie Mac provide guidelines for consumer loans, banks have created overlays that further restrict access to credit. While FHA might allow low-FICO loans, good luck finding a bank that’ll write that loan.

These days, buyers with less than stellar credit fear applying for a mortgage given today’s tight credit restrictions. While buyer pessimism may contribute, there might be another reason down payments are getting higher.

“If you’re a seller and you have to chose between two offers, one with a low down payment and the other with 20%, you’re going to take the stronger offer,” said Adam McLain, a mortgage broker at Wintrust Mortgage in Chicago. “That larger down payment sways sellers.”

The average down payment in 2014 was 15.4%, according to RealtyTrac, down slightly from 15.6% in 2013. Down payments hit an 11-year low in 2009 when they averaged 12.9%, according to the report, which comes on the heels of Fannie Mae announcing that it would start allowing 3% down loans. Freddie Mac will start accepting 3% down loans next month.

Take the average purchase price of $291,428, and in 2014, the average buyer brought $58,496 to the closing table, according to RealtyTrac.

The lower the price of the home, the lower the down payment tends to be, according to the report. The average sales price for a house with a 3% down payment was $154,214. On the other end of the spectrum, borrowers who purchased $500,000 houses tended to put down 50%.

To industry experts, the down payment’s relationship to home price is not surprising.

“Nonconventional loans like jumbos often require more than 20% down,” said Smoke. “So if the market has shifted to higher price points, which it has, and higher income, more qualified buyers, which it has, then of course the down payments would be going up.”

Still, in order for the housing market to fully recover, all qualified buyers have to participate—and that means lenders will have to embrace a wider pool of applicants.

Because You Like New Construction, Mortgage Rates Are Up

Real Estate Logic 101: Buyers always prefer new construction, even though new construction prices are rising. Therefore, mortgage rates are going up.

That’s according to the Freddie Mac Primary Mortgage Market Survey, which reported that new-home sales and price appreciation had driven the average 30-year fixed-rate mortgage to 3.8% this week, up from 3.76% last week. That’s actually down from this time last year, when it averaged 4.37%.

New-home sales were largely flat in January but are up 5.3% from last year. The median price of that newly constructed house is now $294,300, up from $218,000 last January, according to the Census Bureau and the Department of Housing and Urban Development.

“The issue is affordability. Builders have traded higher prices and margins and steady demand for opportunity of higher volumes,” said Jonathan Smoke, chief economist atrealtor.com®. “Supply isn’t growing, and it isn’t helping the lack of supply on existing-home side, so we will continue to see home shoppers report that they can’t find homes to fit their needs and/or budget.”

In this tight inventory market, there’s only a 5.4-month supply of new homes to feed buyer demand at the current sales rate. In a normal market, there would be six months of inventory available. Heck, during the housing market heyday, builders would have spec homes built and ready for the next buyer. But those days are gone.

Many would-be buyers simply can’t find a home to purchase in this low-inventory environment. That said, purchase mortgage applications declined 3.5% from a week earlier, according to the Mortgage Bankers Association. Refinances were also lower, diving 8%.

The bright spot: FHA loans, a homebuilder loan of choice. FHA loan applications increased slightly to 15.3% of all application activity this week but accounted for only 8.7% of applications in the second week of December. As the monthly insurance premiums for these government-backed loans have been slashed, its market share has increased.  Likewise, VA loans increased to 9.6% this week from 8% last week, according to the MBA.

Mortgage rates

• 15-year fixed-rate mortgage averaged 3.07% this week, up from 3.05% last week. A year ago at this time, the 15-year FRM averaged 3.39%
• 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 2.99% this week, up from 2.97% percent last week. A year ago this week, it averaged 3.05%.
• 1-year Treasury-indexed ARM averaged 2.44% this week, down from last week, when it averaged 2.45%. At this time last year, it averaged 2.52%.

January Saw Fewer New Homes Started, So the Housing Market Will Remain Tight

The data released on Wednesday on new home construction show a mixed bag: Groundbreakings are slightly down month over month, but compared to this time last year, they’re way up—signifying a steady recovery in the housing market.

That’s good news in the long run, right? Not so fast. Jonathan Smoke, our chief economist, says the data show a “glass-half-full picture.”

That’s because the 2% month-over-month drop reflected in single-family units—which make up the bulk of the market—won’t help the already tight supply of homes available.

“If supply is a problem—and it is—this level of growth is not going to alleviate the pressures building from increased demand,” Smoke said.

“At this level of activity, new home construction remains 40% below a more typical level for a strong, expanding economy,” he added. “The housing market simply won’t be able to support a surge in household formation and interest in buying that should follow the stronger economic context. If we don’t see growth in new construction and listings this spring, we’re likely to see more price appreciation ahead than the more moderate gains initially expected for 2015.”

U.S. housing starts—the groundbreaking on new homes—fell in January to a seasonally adjusted annual rate of 1.065 million, the Commerce Department said on Wednesday.

That’s offset by months of good news, though. Starts have now been above the 1 million mark for five straight months. And compared to January last year, groundbreaking was up nearly 19%.

Plus, January’s figure may have been affected by rough weather conditions across the country.

Economists believe the housing market is poised to pick up as the labor market improves. But significant challenges remain, such as supply, tight credit conditions, and lack of savings by consumers.

“Most of the negative factors limiting growth in the housing market have gone away, and key indicators point to increasing demand ahead,” Smoke said. “Supply should follow as prices make it worthwhile for existing homeowners and builders alike to put homes on the market, but we’re just not seeing that supply materialize yet.

Rent-Stabilized Tenant Evicted After Cashing In on Airbnb

A Manhattan Housing Court judge has ruled that rent-stabilized tenants can’t double-dip—or get a financial break and turn around and make money peddling their pads to tourists on websites such as Airbnb.

The ruling is the first to outright evict a tenant under rent controls without giving him a second chance, said Frank Ricci of the Rent Stabilization Association, which represents more than 25,000 landlords.

And the decision lays down the law for most of the 35,354 Airbnb listings in the city, whose hosts make about $304 million in revenue, said state Sen. Liz Krueger, an opponent of the site.

“This decision reinforces what tenant advocates and I have been saying all along—almost all NYC residents who list their homes on sites like Airbnb are violating the terms of their leases and putting themselves at risk of eviction,” Krueger said.

While Justice Jack Stoller’s decision is not considered case law, it can be cited in rulings to thwart would-be Airbnb users.

Stoller was incensed over a subletting scheme by Hell’s Kitchen tenant Henry Ikezi and ordered him evicted from his discounted two-bedroom penthouse by the end of the month.

“Using a residential apartment as a hotel room and profiteering off of it is ground for eviction … as it undermines a purpose of the Rent Stabilization Code,’’ Stoller wrote in his 12-page ruling issued Feb. 17.

Ikezi paid only about two-thirds of the 450 W. 42nd St. apartment’s $9,000-plus market price, or $6,670 a month, because it was rent stabilized.

He then listed it online for $649 a night.

Ikezi insisted he lived there with his wife and child while tourists also temporarily stayed in the pad, as required by law.

But his landlord scoffed at the claim, and sources said the family actually lives in a million-dollar-plus home in Jamaica, Queens, while Ikezi used the 46th-floor apartment as a revolving door for paying tourists.

Stoller wrote that Ikezi benefited from a discounted rent because his building receives a 421-a tax exemption and therefore can’t rent it out for triple what he pays the landlord, Related Companies.

Ikezi, 35, who the ruling says flips houses for a living, claimed to the judge that he couldn’t recall whether he had ever charged anyone to stay in the apartment.

Confronted with his Airbnb ad touting the unit’s “skyline views” in “the hippest, hottest, most happening neighborhood in Manhattan,” Ikezi claimed it might be an upstairs neighbor’s pad with similar furnishings.

Ikezi’s lawyer, Nick Moccia, declined to comment.

Ikezi must leave the apartment by Feb. 28 or a city marshal will force him out, the ruling says.

Related’s lawyer, Todd Nahins, said the firm, which owns 24 luxury residential buildings across the country, is cracking down.

“They will go after anyone who is not using their apartment properly,” Nahins said. “They will not tolerate the apartment being used as a hotel.”

Ikezi’s neighbors complained about loud parties and strangers coming and going, Nahins said.

Airbnb spokesman Nick Papas said, “We advise all hosts to review their local rules before they share their space, and we believe we need smart limits on home sharing in rent-regulated apartments.”

But Krueger said the company, which reportedly makes $40 million off New York listings, isn’t doing enough to set limits.

“The real culprit here is Airbnb, which makes millions by encouraging New Yorkers to violate their leases without even informing them of the risk,” Krueger said.

All-Cash Sales Are Declining—and That’s Good for Home Buyers

When the housing market collapsed at the end of 2008, an odd thing happened—Wall Street investors became single-family-home buyers. But the end is near. Hedge funds are losing their lust for houses, opening the door back up to traditional buyers.

Investors understood the adage, buy low and sell high. With money pouring in from around the globe, investors formed REITs and hedge funds targeting America’s housing stock as the new publicly traded commodity. Now, however, cash sales are on the decline, and that’s good news for home buyers. At their peak in 2011, all-cash sales accounted formore than 46% of all home sales nationwide.

With low interest rates and easing credit restrictions, buyers are taking advantage of off-peak prices and becoming homeowners. Cash sales made up just 36% of all home sales at the end of 2014, marking the 23rd straight month of decline, according to CoreLogic, a California-based real estate analytics provider.

At the current rate, CoreLogic is predicting the share of cash investors to reach pre-housing-crisis levels of just 25% by 2017. Of course, there are still markets attracting lots of cash buyers, most in Florida—Miami (57%), West Palm Beach (56%), and Fort Lauderdale (55%), according to CoreLogic. Washington, DC, on the other hand, has the lowest level of cash buyer activity at just 16%, according to CoreLogic.

For regular home buyers, that’s good news. With cash-flush investors in the mix, regular buyers had to fight bidding wars in hot markets, and their need for financing put them at a disadvantage. Now that Wall Street’s appetite for housing is waning, entry-level buyers may finally be able to get a foot in the door, literally.

But don’t sleep. Wall Street is still changing the game. Those same hedge fund managers who were buying up houses throughout the recession have transitioned to managing their rental portfolios. It’s no longer about flipping; it’s about holding. This is the long game. So, if you’re renting a single-family home and enjoying the perks of suburban living, don’t be surprised if your landlord is actually Gordon Gekko, or one of his real-life counterparts

Why Not "Test Drive" a House?

If you can test drive a car, why not a house?

That is the theory behind several programs that let buyers try out a condominium or resort home before they commit to buying. A handful of developers, listing agents and homeowners say they are willing to let potential buyers hang out with the neighbors, have dinner in the kitchen or even spend a night or two in a home before making a final decision.

Raquel Gillett, an officer at a bank in Irvine, Calif., decided to test the waters before buying a Mediterranean-style home for more than $700,000 in Toll Brothers’ master-planned Parkview community in October. Ms. Gillet took advantage of the sales manager’s offer to introduce prospective buyers to residents for an inside view of what it was like to live there. She attended a pool party where she met her potential neighbors. “I think the most important thing to me was getting to know them,” she says. “It gave us a comfort level with each other when we were going to be on the same block.”

For individual homes on the market, the opportunity to test out a home or a neighborhood in advance remains rare. Carol Bird, a Malibu, Calif.-based real-estate agent, says that in her 25 years in the business she has fielded only a couple of requests from clients asking to spend significant time alone in a home before buying. One, she said, wanted to get a sense of traffic noise at different times of day. He ended up purchasing. The second wanted to try out a home’s numerous high-tech features, unusual at the time. He decided not to buy.

Ms. Bird says she thinks the test-run is ill-advised. “Either they already liked the house and then change their mind and you lose the deal, or it stays the same,” she says.

Others say it can benefit buyers. “It makes sense; you spend more time trying on a pair of shoes than you do buying a house,” says Susan Vanech, a Westport, Conn.-based agent who recently listed a home she owned for $574,000 and was open to potential buyers sleeping over. “It’s quite possibly the largest individual investment you’ll make in your life.”

Ms. Vanech says no one took her up on the offer to spend a night in the listed home; it recently sold for just above asking.

Toll Brothers, one of the country’s largest home builders, also has a Fly and Buy program for buyers who want to travel to a new town to check it out. Travel costs can then be put toward a purchase contract. The company says for liability reasons they don’t allow overnights in model homes, but can put prospective buyers up in guest units in certain communities or in nearby hotels.

Honua Kai Resort & Spa, a luxury condominium complex on Maui’s Kaanapali Beach, launched a Stay and Play program about three years ago when sales were slow amid the recession. Though sales have picked up in the past year or two, they have continued the promotion. Prospective buyers can rent condos that have been placed in a rental pool for between $250 and $2,200 per night. If they decide to purchase, the cost of the stay can be applied to their purchase. Prices range from $985,000 for two-bedroom condos to $3.9 million for the largest three-bedroom units.

Erika Alm, a principal at PowerPlay Destination Properties, which oversees sales and marketing for the development, says two of the latest three units sold were to people who tested them out while in contract, before closing the deal. “Some people know they’re going to buy at Honua Kai but they’re not quite sure,” she says. “They make an offer and then say, ‘Could we try this out?’”

Wheelhaus, a company that manufactures luxury prefab houses as small as 400 square feet, recently launched a “try before you buy” campaign where potential buyers willing to travel to the company’s headquarters in Jackson, Wyo., can spend the night at a resort made up of several Wheelhaus models. The company fully reimburses the cost of a stay if a guest goes through with a purchase.

“A big problem with buying a tiny house is making the transition and the shock of, ‘What did I just do?’” says Jamie Mackay, the company’s founder. “It’s good for our buyers to get to touch and feel.”

So far, about 40 people have taken advantage of the program, says Mr. Mackay, and more than 75% of them have ended up purchasing their own Wheelhaus. Vince Crivello was one of them. He was interested in a 400-square-foot Caboose model Wheelhaus with one bedroom and a sleeping loft, in part to downsize from his 2,700-square-foot home in Marin County, Calif., but he wanted to make sure he’d be comfortable with such a major change.

“The first thing I did was go to the grocery store to buy a bunch of groceries,” says Mr. Crivello, who is in the investment-management business. The kitchen had a two-burner stove, a small refrigerator and minimal cabinet space, and he “wanted to make sure it would work.”

Mr. Crivello says his test-drive prompted him to add an outdoor storage shed to his property, and to request the windows be placed to maximize his view of the outdoors. He also figured out that cooking larger meals was doable if he also used an outdoor grill on the patio. His total cost for the home will be about $125,000, including making some adjustments to his plot of land to prepare it for the Wheelhaus, such as adding septic, electrical and water connections.

Ginny Beasley, a Ridgefield, Conn.-based real-estate agent, says the sellers are open to overnights for a historic country estate in Redding that has recently been reduced to $4.5 million. “We would need to do a background check—there are some really wonderful antiques in the house,” she says. The 6,385-square-foot home has six bedrooms and seven bathrooms and is on a 24.3-acre lot with formal gardens, river frontage and a swimming pool with a pool house.

Homeowner Janice Meehan says she and her husband are open to either hosting qualified buyers for dinner or letting them spend the night alone. The house, built in 1768, has been on the market since May, she adds, and the two are eager to move on now that their children have left home. She says she feels like “it belongs to everyone” because it has so much history.

“There’s so much to it and it’s such an experience, not just like, ‘Come in and see six bedrooms and six bathrooms,’ ” she says. “It would be fascinating to host my neighbors and introduce a prospective buyer—or if they wanted to be by themselves, that’s cool, too.”

Free Money: $12,000 for Down Payment, Why Aren’t You Applying?

If someone offered you 10% for a down payment, would you take it? “Absolutely,” you say. Well, most people overlook thousands of dollars available to them—because they don’t know to apply for it.

There are 2,290 down payment programs across the country waiting for home buyers to apply for funds, according to a joint analysis recently issued by RealtyTrac, a real estate data provider, and Down Payment Resource, a purveyor of home-buyer assistance programs. The average amount of down payment assistance per buyer is $11,565, according to the analysis.

“It’s important for buyers to research down payment programs as part of their loan shopping process,” said Rob Chrane, president and CEO of Down Payment Resource. As a former Realtor® turned mortgage lender turned entrepreneur, Chrane started DPR to help bridge the gap between these programs and the home buyer.

Missed opportunity

The problem is, few people know his company exists—let alone that there is money out there to help them become homeowners.

“There’s a lot of missed opportunities here,” he said.

Of the 78 million single-family homes and condos in the United States, more than 68 million, or 87%, would qualify for a down payment program, according to the report. Of course, not all of those houses are on the market. The report looked at parcels and matched them with county-, state-, and federal-level assistance programs.

In each of the 3,143 counties in this country, there is a down payment program available, according to the report.

“Consumers do not know about these programs, and those that do assume it’s more difficult to get than it is,” said Jonathan Smoke, chief economist at realtor.com®.

First-time buyers

The housing market is in the midst of recovery from its 2009 collapse. Houses are selling and prices are rising. Yet first-time buyers are largely absent from the recovery. Historically, they make up 40% of annual sales, according to the National Association of Realtors®. Last year, however, they accounted for 33%, the lowest level since 1987.

For many would-be buyers, saving for a down payment is a known barrier to entry. According to a sample of more than 900 randomly selected visitors to realtor.com in January, 12% said they lacked enough funds for a down payment. That proportion more than doubles to 26% of those who identify themselves as first-time buyers, according to Smoke.

“More than half the interested buyers in our agents’ pipelines are more concerned with pulling together today’s required down payment than meeting the income-to-debt ratio requirements,” said Mark Hughes, chief operating officer at First Team Real Estate in Irvine, CA.

The industry

Shad Bogany, past chairman of the Texas Association of Realtors® and a licensed Realtor, blames the industry.

“When buyers come into the market, if they get with the wrong lender or the wrong agent, they won’t find out about these programs,” he said. “Some banks have portfolio products, but you would never know about it because nobody advertises it.”

In Houston, upper-tier houses are selling at a record clip. Home sales achieved record highs on the back of record low inventory, according to the Houston Association of Realtors®. Last year, the median price of a single-family home rose 10.6% in Houston driven by houses priced at $250,000 or more.

“If you’re buying on the high end, we’re selling those left and right,” said Bogany. “There’s not a lot of people looking out for that first-time home buyer.”

Home-buyer programs are usually administered by nonprofit organizations with limited budgets for advertising. In this fragmented marketplace of grants, tax credits, and reduced mortgages, there are more than 1,100 program providers, said Chrane. What’s more, any given marketplace may have dozens of providers.

‘Millennials are the key’

If first-time buyers, particularly millennials, took advantage of these programs, Chrane said the housing market would see a boost in sales.

“Millennials are the key to the recovery,” said Smoke. “If Realtors want the market to grow 8%, they have to work harder to support the first-time home buyer.”

While there will always be critics of any program that reduces the down payment requirement or provides funding assistance to qualify for homes, Smoke says that betting on qualified first-time buyers offers little risk. Most millennials—those aged 25 to 35—are employed and earning high incomes but lack the “wealth” or savings necessary to buy a home, he said. They are saddled with student loan debt but aspire to be homeowners.

Resources for buyers

That means Realtors and lenders alike need to research and understand various funding resources for buyers. Major program types include the following:

• Below-market interest rate loans or 100% financing
• Mortgage credit certificates that provide up to $2,000 in annual tax credits for the life of the loan
• Neighborhood Stabilization Program loans and grants designed to revitalize communities

Safety Concerns Changing How Consumers, Realtors® Interact

In the wake of the kidnapping and murder of Arkansas real estate agent Beverly Carter last year, agents have been beefing up their safety measures when it comes to showing houses to new clients.

Many brokerages have hired safety experts to teach Krav Maga self-defense techniques, and real estate coaches are promoting smartphone apps such as SafeTREC, EmergenSee, and Real Alert—all in an effort to keep agents safe. There is widespread discussion at the broker level about safety, and now those talks are shifting to the consumer.

New guidelines for client interaction

For many years, people have been treating the home-buying process like a recreational activity. They see a “for sale” sign, call the number, and expect an agent to show up and show them the house immediately. This is not just a bad business model, it’s also a safety hazard—but that’s going to change. The real estate industry is responding with new guidelines to shape the way agents interact with new clients in an effort to protect them both.

“We have to reeducate the public about their expectation of us,” said J. Philip Faranda, broker owner of J. Philip Real Estate in Briarcliff Manor, NY. “Even a $1,200 used-car dealer requires a driver’s license to verify that you can legally drive that car. We have to do the same.”

Many real estate companies are setting new expectations for how their agents do business with strangers:

• All potential clients are asked to meet the agent in the office for an initial consultation.
• All potential clients are asked to present identification upon meeting the agent.
• All potential clients are asked to be pre-approved by a lender before seeing properties.

How does this protect consumers?

These new initiatives ensure that everything is aboveboard. It provides a paper trail for the brokerage, while also providing a sense of accountability to the seller. With these initiatives, homeowners no longer have to fear that random strangers are walking through their house. Each prospective buyer is qualified and verified.

“This is a smart business move. We’re not just concerned about safety; we don’t want to waste the agent’s time either,” said Faranda.

He says serious buyers want to be pre-approved and will follow proper guidelines without taking offense. Furthermore, there are millions of vacant homes on the market. Real estate agents and consumers alike should want a paper trail or electronic log of where they are going and whom they are with.

“Who knows what’s lurking behind the closed door of a vacant house,” said Gary Isom, executive director of the Arkansas Real Estate Commission.

Most consumers are honorable, he said. It’s that other percentage that we have to develop guidelines around, he added.

The National Association of REALTORS® spends $35 million annually on public awareness, said NAR President Chris Polychron. Safety is his No. 1 priority.

“Primarily we educate our REALTORS®, and we want to make sure they educate the consumer,” he said. NAR is unveiling new safety initiatives in May.

NAR advice for sellers

Physical harm is a major concern, but theft is also an issue. Touring properties is a trust-based action. Agents can do their best to make sure they know whom they’re dealing with, but they can’t weed out all the bad apples. To help, the NAR has developed the following guidelines for sellers:

• Stow away valuables. During showings, sellers cannot always depend on the agent to watch every move a client makes. Be sure to safeguard all jewelry, prescription drugs, and small poachable items.
• Remove family photos. Agents have often told sellers to do this as a way to allow potential buyers to envision themselves in the house. It’s now a safety concern. What if a pedophile is the buyer prospect and he’s checking out pictures of your children?
• Do not allow unscheduled showings. With mobile listings, people know when your house is on the market. It’s not unusual for prospective buyers to ring your doorbell and ask to see your house. Don’t let them in. All showings should be coordinated with your listing agent.
• Before leaving the house for a showing, turn on all the lights. This way, both the agent and the prospective buyer are safe while touring the home. It would also prevent burglars from taking advantage of dark corners.

The Process of Getting a Mortgage May Move Completely Online

The Internet is often the first place mortgage seekers turn to research how much they can afford and to get rate quotes. But many borrowers say they wouldn't mind if the entire mortgage process moved online—and for some, that’s becoming a reality.

Of recent home buyers surveyed by Discover Home Loans, 36% said a mortgage process without any phone calls or meetings with the lender or broker would be much easier. Seventy-one percent of the 1,003 people surveyed said they've already submitted lender documents through email, apps or websites, 54% filled out online mortgage applications, 50% scanned and submitted closing documents and 47% got prequalified for a mortgage through a lender’s website, according to the survey results.

“The use of technology has come a long way, and it’s an exciting time,” said TJ Freeborn, senior manager of customer experience at Discover Home Loans. “Technology can be used to research lenders, research the type of loan that may be most applicable…and can be used to interact with the lender of choice.”

E-signing and e-consenting options have also made it easier for customers to sign off on documents, and it’s often easier to follow up and make sure mortgage bankers receive those emailed documents—as opposed to relying on traditional mail service or faxing paperwork, she added.

“Ten, fifteen years ago, we didn't have these options,” Freeborn said.

Another company, Lenda, around since the fall of 2013, takes the process completely online.

“You get a rate quote customized, then complete the application online and electronically sign disclosures, before uploading needed documents,” said Jason van den Brand, co-founder and chief executive of the company.

Handling a loan online leads to a more efficient process, he said, and that translates to lower costs and fees for borrowers—as well as shorter closing times, the company claims. You also can follow the status of your loan online at any time, unlike having to call a banker for updates, he said. Currently, Lenda only works with mortgage refinances and operates in California. This month, it will expand to Oregon and Washington.

Getting a mortgage entirely through online communication is particularly appealing to millennials, who—over the next decade or so—are expected to graduate into their prime home-buying years, van den Brand said.

Another study of 1,325 mortgage borrowers from Fannie Mae found that in addition to being younger, recent mortgage borrowers are more educated and earn higher incomes than prior mortgage borrowers—and are “significantly more likely to use the Internet when managing personal finances and shopping for a mortgage.”

As for now, however, most people are doing business the traditional way, at least some of the time, according to the Discover report. Some 94% of home buyers said they communicated with their lenders by phone and 67% said they met in person, the survey found.

Down Payments Get Smaller

It is getting easier for some buyers to land a house with less money up front.

More lenders are lowering down-payment requirements, allowing borrowers to commit 3%—or even less—of a home’s purchase price to get a mortgage. Most had been requiring down payments of 20% or more since the recession began, with a few exceptions.

Some lenders also are waiving mortgage-related fees, and more are allowing down payments to be made by other parties, such as the borrower’s family.

The deals are aimed at buyers with good credit scores and a steady income who have been unable to save enough for a sizable down payment. They are often targeted at buyers who live in expensive housing markets, where even a small down payment can equal tens of thousands of dollars.

The trend toward lower down payments has picked up since mortgage-finance giantsFannie Mae and Freddie Mac, which buy most mortgages from lenders, recently lowered the minimum down payments they will accept to 3% from 5%. The changes are driven by an Obama administration effort to make homeownership affordable to a wider group of buyers.

Low-down-payment mortgages have long been available. The Federal Housing Administration insures mortgages with down payments as low as 3.5%, and it is lowering the annual mortgage-insurance premiums on new mortgages beginning on Monday.

Borrowers should be aware that small down payments leave them more at risk of owing more on their mortgage than the property is worth should home values in their market decline, says Jack McCabe, an independent housing analyst in Deerfield Beach, Fla. In addition, borrowers likely will incur higher costs over the life of the loan, including higher interest rates and, often, mortgage insurance.

The moves come as mortgage originations declined substantially last year. Lenders gave out an estimated $1.12 trillion in mortgages in 2014, down 39% from a year earlier and the lowest amount since 1997, according to the Mortgage Bankers Association, a Washington-based trade group.

Most mortgages have been going to existing homeowners who are refinancing into lower interest rates, as demand among home buyers has been low compared with historical norms.

Regions Bank, a unit of Regions Financial, launched a mortgage program in September that allows some borrowers to make a 5% down payment. The bank says it will lower that requirement in the next few weeks to 3%. To qualify, borrowers must meet certain criteria, including not having owned a property or had a mortgage in the past three years.

TD Bank, the U.S. unit of Toronto-Dominion Bank, is allowing first-time buyers to put as little as 3% down through its “Right Step” loan program. The bank—which also is extending the offer to low- and moderate-income borrowers as well as those purchasing a home in some up-and-coming neighborhoods—lowered its cash-down requirement from 5% last year.

The banks allow borrowers’ down payments to be partially or fully funded by family, nonprofits or other sources.

Lenders also have been lowering the bar for large mortgages, known as ”jumbos,” which they typically hold on their books. Such loans exceed $417,000 in most parts of the country and $625,500 in pricier housing markets such as New York and San Francisco.

In November, PNC Financial Services Group began allowing exceptions to its down-payment requirements for jumbo mortgages, says Tyler Case, a loan officer at PNC’s Fords, N.J., branch. The lender, which has been requiring at least 20% down for jumbos up to $1.5 million, lowered that to 15% for borrowers whose income and assets go beyond what the bank generally requires. To qualify, borrowers will need a higher credit score and less debt relative to their income than is usually required, as well as having savings after the home purchase equal to at least 12 months of mortgage payments.

PNC also is offering exceptions on down-payment amounts for larger loans up to $3 million.

Wells Fargo, meanwhile, began permitting down payments of as little as 10.1% last year on jumbo mortgages. Previously, its lowest down payment on jumbos was 15%.

Borrowers who want to get a mortgage with a particular lender should ask if it would allow a lower down payment than what is officially offered. PNC, for example, isn’t advertising its 15% option, Mr. Case says. Instead, it is offering it to eligible borrowers who inquire or mention that they have been offered lower down-payment loans at competitors, he says.

The costs associated with these low-down-payment mortgages can vary significantly. The interest rate and fees borrowers pay often depend on whether the lender plans to sell their mortgage to Fannie or Freddie, or if it plans to hold the loan on its books, in addition to borrowers’ qualifications.

Borrowers need to compare costs, including the interest rate, whether they have to pay any upfront fees to get that rate, and what their total costs to get the loan will be. A lower interest rate might not be a good deal if it requires larger out-of-pocket payments.

Often, borrowers have to pay an extra fee for private mortgage insurance, which protects the lender from incurring significant losses if the borrower defaults, in exchange for a low down payment. In most cases, the fee is included in the monthly mortgage payment, though borrowers sometimes have the option to pay it as an upfront charge.

Mortgages purchased by Fannie Mae and Freddie Mac usually require private mortgage insurance if the down payment is less than 20%. Lenders generally decide which mortgage-insurance firm to work with.

Borrowers with higher credit scores, smaller loan amounts and fixed-rate mortgages pay less.

The size of the down payment also matters. Typically, someone with a FICO credit score of 760 or more—on a scale that tops out at 850—who is making a down payment of just under 5% and getting a $400,000, 30-year fixed-rate mortgage will incur at least a 0.57% fee, according to Radian Guaranty, a unit of Radian Group, and Mortgage Guaranty Insurance, a unit of MGIC Investment, two of the largest private mortgage insurers.

That comes out to $190 a month. The same borrower with a down payment of just under 10% would incur a fee of at least 0.43%, or $143 a month.

Before signing up, borrowers should find out if they will incur these costs, and for how long. They should consider asking their lender if they can stop paying this fee when they reach at least a 20% equity stake in the home through a mix of home-price appreciation and amortization, for example, says Keith Gumbinger, vice president at mortgage-information website HSH.com.

Lenders who hold low-down-payment mortgages on their books typically don’t require this insurance. But the loans may not be a bargain, he says, because they often charge interest rates that can be an eighth to a quarter of a percentage point higher.