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.

Rent vs. Buy: A $700,000 Decision

Most millennials say they’d rather rent than buy a home — a decision that could cost them more than $700,000 over the course of their lives.

Nearly six in 10 millennials (59%) say they’d rather rent a home than buy one, with just one in four saying they are either very or completely likely to purchase a home in the next five years, according to a survey of 1,300 millennials released this week by EliteDaily and Millennial Branding. (This anti-home-buying trend can already be seen: Currently, only about one in four millennials own a home, down from about one in three in the mid-70s and early 80s, according to data from the Demand Institute.) That’s “bad news for the real estate industry,” the report concludes.

The reasons for this sentiment are many. More than six in 10 feel they simply can’t afford it, the survey revealed (whether or not they actually can’t afford it is another question entirely). Plus, millennials tend to marry and have children later (two events that often inspire home purchases) and are a generation that doesn’t like feeling stuck in one place, says Dan Schawbel, the founder of Millennial Branding.

Whatever the reason, this decision may be a costly one. “In most markets it is still cheaper to buy than to rent [each month]” — even when you factor in the insurance and property tax payments, in addition to the mortgage payments, says Daren Blomquist, vice president of RealtyTrac. And because interest rates are so low, now is a good time to buy in many markets — at least if you plan on staying in the home over the long term (Blomquist says that, as a very rough rule of thumb, if you don’t plan on staying in the home you are buying for at least five years, it may make sense to rent instead of buy).

Plus, you’re working toward owning an asset when you buy — that’s not the case when you rent. Considering that the median home in America costs $190,000 and historic annual home price appreciation is around 3%, according to data from RealtyTrac, a millennial who bought an average home today (and put $19,000 — that’s 10% — down) with a 30-year fixed rate mortgage at 4% would outright own a home worth $426,000 in 2045, and pay a total of roughly $373,000 for it (mortgage, taxes and insurance included) — a difference of $52,000. Plus, after 30 years, the person could live rent-free — a compelling prospect for retirement.

If that same millennial rented — let’s assume he pays $1,312 a month in rent this year (which is the average fair market rent for a three-bedroom nationwide, according to RealtyTrac) — and his rent appreciates at a rate of 2.7% a year (the average increase over the past decade, RealtyTrac says), he’ll end up shelling out nearly $717,000 in rent over that 30-year period — all without an asset to show for it in the end. Of course, he can cut that by having roommates, but at some age, he’s probably going to want out of the roommate game, unless it’s a spouse or love interest.

That said, many millennials will likely rent now but buy a home down the road. But waiting to buy has its costs, too — interest rates and median home prices are likely to rise down the road. At current rates of appreciation, in 10 years the average home (now priced at $190,000) would be selling for about $249,000. If interest rates return to their historical norm (from over the past 15 years) of 5.6%, a monthly house payment (including mortgage, taxes and insurance) on a $249,000 home would be $1,574 a month, a 52% increase over the $1,037 house payment for a median priced home now; plus, over that 30 years, you’d pay a total of $566,640 (assuming you put 10% down) for a home worth $558,356 at the end of that period. “In this scenario you wouldn’t come out positive on your investment in the property until a year after the mortgage was paid off, in 2056 — at which point the home would have a projected value of $573,608,” explains Blomquist.

Of course, there are some compelling reasons to rent. You have more flexibility when renting, as you aren’t tied to a mortgage payment, and savvy investors can likely get higher than 3% annual returns elsewhere. And, quite frankly, “if you can’t afford it, don’t buy,” says Blomquist; you don’t want to end up in a situation where you have to foreclose on a home.

By: Catey Hill - Market Watch Reporter

Oil’s Decline Benefits the Economy More Than It Hurts

The steep decline in the price of oil has temporarily thrown a curveball into the financial markets. Lower oil prices in December led to lower gasoline and energy prices. Oil declined even further in January, which means this deflationary pressure isn’t finished working its way through the economy. Will this trend dampen the positive outlook for housing and the economy in 2015? On the contrary, lower energy prices should be a net positive for the economy and housing in most markets in the country.

Lower energy prices and global economic weakness have given us one more shot at historically low interest rates. It’s not clear yet if these short-term trends will keep interest rates this low through the start of the spring selling season, but the average 30-year fixed conforming mortgage was at 3.66% this week and the 15-year fixed conforming fell beneath 3%. As a result, mortgage applications surged.

Consumers continued to be buoyed by the cheaper prices they are paying at the pump. The initial reading from the University of Michigan released today showed that consumer sentiment in January rose almost 5% over December and was up 21% from last January. Consumers haven’t been this happy according to that measure of sentiment since January 2004.

Effect on U.S. oil producers and their workers

The primary negative from lower oil prices is the impact it will have on the areas of the country that have benefited from significant growth in the extraction and production of oil in recent years. Those were often the areas that had the strongest economies from 2011 to 2013, and now they are most at risk to see some economic weakness from oil companies cutting back on investment and even potentially laying off employees.

According to analysis of employment data published by the National Association of REALTORS® this week, just over 197,000 people are employed in oil and gas extraction in the U.S., or 0.14% of total employment. Even in Texas, the percentage of the workforce involved in gas and oil extraction is less than 1%.

A net gain for consumers

The energy sector may suffer, but other businesses and the consumer will gain. Petroleum is an ingredient in many other products, like plastics. Energy is required for every type of business. Transportation cost is a core part of the final goods we purchase. And transportation itself is a key part of our day-to-day lives.

Even oil-producing Texas, on the whole, will benefit from a lower price of oil. In Texas, 9.7 million workers drive themselves alone to and from work each day, spending almost an hour total on average in their cars and trucks, according to current estimates from Nielsen Demographics.

A recent survey by The Wall Street Journal showed that economists are now even more upbeat about the prospects for the U.S. economy in 2015 as a result of the lower oil prices.

At least based on the retail sales data from December, not all of the savings from lower gas prices are being spent on other goods. I view that as a potential positive as well—it could be that many households are saving up their weekly gasoline windfalls to apply to a down payment on a new home.

Jonathan Smoke is chief economist at realtor.com.

The $25,000+ Mortgage Mistake Nearly Half of Borrowers Make

Did you pay too much for your mortgage? If you’re like millions of Americans, the answer is probably yes — and that means you may be throwing tens of thousands of dollars of your hard-earned money at the bank, when you might not need to.

A report released Tuesday by the Consumer Financial Protection Bureau finds that almost half (47%) of Americans don’t shop around for a mortgage when they purchase a home. “Consumers put great thought into the choice of a home, but the mortgage process continues to be intimidating,” CFPB Director Richard Cordray said in a statement.

Number of lenders Americans seriously consider before applying for a mortgage

Source: Consumer Financial Protection Bureau

If you don’t shop around for a mortgage, you’re probably leaving free money (and a lot of it) on the table. “Interest rates can span more than half a percent for a conventional mortgage for borrowers with a good credit rating and a 20% down payment,” says Sam Gilford, a spokesperson for the CFPB.

While half a percent may not sound like a lot, it can be a more than $25,000 mistake for the average borrower (as of November 2014, the average price of a home sold in the U.S. was about $321,800, according to data from The Census Bureau), who takes a mortgage that’s half a percent higher than one he could have gotten by shopping around.

Say a borrower accepts a 4.5% interest rate instead of a 4% interest rate on the average home (a sale price of $321,800 and a down payment of 20% means he borrows a total of $257,440). If he gets a 30-year fixed rate loan at 4.5%, he’ll pay a total of $212,148 in interest; for a 4% interest rate, he will pay just $185,021 — a difference of more than $27,000.

For those who buy a home that costs more than average — or who put down a smaller down payment than 20% even on an average home — the results may be even more grim. For example, a person who gets a $500,000 mortgage would pay more than $412,000 in interest over the life of his 4.5% 30-year fixed rate loan, which is roughly $53,000 more than with a 4% rate.

To be sure, many people who don’t shop around may get the best rate anyway — or at least close to it. Others get a mortgage that may be a little too costly, but will later refinance and save themselves money. And still others will sell their home well before the 30-year loan period is up, so they end up paying less in interest.

Still, experts say it’s worth shopping around, as even 1/10th of a percentage point can mean thousands of dollars in extra payments to the mortgage company over the life of a loan. Luckily, doing so is relatively easy. Before shopping around, Greg McBride, the chief financial analyst for Bankrate.com says that you should pull copies of your credit reports from each of the three major credit bureaus (you can get these for free atannualcreditreport.com), consider what type of loan makes the most sense for you (see MarketWatch’s “How to Get a Mortgage” guide) and figure out how large of a loan you can afford (there are dozens of online calculators that can calculate your monthly payments and more).

Once you’ve done that, McBride says that you should get quotes from your local bank and credit union as well as online and apply with up to three lenders on the same day. (Kathleen Campbell, the founder of Campbell Financial Partners in Fort Myers, recommends using Bankrate to check mortgage rates, and considering online lenders like Quicken Loans, CapitalOne 360 and Pentagon Federal Credit Union.) Finally, “compare all lender fees and rates, negotiate to get the best deal, and select the best offer,” McBride says.

This story was originally published Jan. 13 on MarketWatch.com.