The lending and real estate markets are constantly changing and lately a bit of a bumpy ride. As an ongoing commitment to you as a past client, I want to keep you informed and share what’s going on in these markets.
Lending Rates and what’s happening?
You may have noticed that interest rates have been quite volatile lately. Despite some slowdown in inflation this year, it continues to be a concern. The recent Silicon Valley bank failure caused some initial panic, but the quick action taken by the Federal Reserve has brought some short-term stability to Wall Street and rising interest rates. While this situation is still unfolding, some experts predict the Fed may delay raising interest rates at their upcoming March 21st meeting.
As of now, the 30-year fixed rate is holding steady at around 6.5%. As we head into Spring, I anticipate interest rates will stabilize between 6% and 6.5%. There are still predictions that by the middle of 2024, interest rates may come back down to the mid to high 4% range.
If you have any additional questions about current and future rate changes, please don’t hesitate to contact me directly.
Sacramento Area real estate and what’s happening?
Real estate and home lending go hand-in-hand. Over the years, I have made some great trusted partnerships with quality local Realtors, like Kris Vogt at The Vogt Real Estate Group. We have worked together on many transactions over the years.
Here’s what Kris had to say about the current real estate market in the Greater Sacramento area…
“After seeing a pullback in prices through last fall, we have seen a leveling off in prices. The exception to that seems to be homes priced below $500k and homes with large lots and pools. These segments are in high demand. Inventory levels continue to remain very low and have dropped since the first of the year. It is our belief that inventory will continue to be low and put some level of support in housing prices.
The best advice we can give buyers, particularly first-time buyers, is to start the process earlier than you think you are ready. That way you can put together a well-thought-out path to purchase and take advantage of opportunities in the market as they arise.”
-Kris Vogt, The Vogt Real Estate Group
Down Payments: The good, the bad, and big decisions
How much of a down payment is required?
The typical down payment percentage required when buying a home varies depending on the type of loan and the lender’s requirements. However, a common range is between 3% to 20% of the purchase price. FHA loans, for example, require a minimum down payment of 3.5%, while conventional loans typically require at least 5% down. VA and USDA loans allow for no down payment, but eligibility requirements apply.
It’s important to note that the size of the down payment can affect the interest rate and overall cost of the loan. A larger down payment can lead to a lower interest rate and may save the homebuyer money in the long run. However, a smaller down payment may be more feasible for some homebuyers, especially first-time buyers.
An experienced lender can help you carefully consider your financial situation and options when deciding on the amount of your down payment.
What are acceptable down payment sources?
When you’re purchasing a home, it’s important to have a solid plan in place for your down payment. A variety of sources are considered acceptable for down payments, including your personal savings, investments, gift funds from family members, or even the proceeds from the sale of a previous home.
- Personal savings: This is the most common source of down payment. Your clients can use their own savings to make a down payment on a home.
- RRSP withdrawal: If potential home buyers have money in their Registered Retirement Savings Plan (RRSP), they can withdraw up to $35,000 tax-free under the Home Buyers’ Plan (HBP) to use towards a down payment.
- Gifted down payment: Home buyers can receive a down payment as a gift from a relative or related non relative. Fannie Mae allows gifted down payments from a relative (like a spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship). A gifted down payment from a non-relative must share a familial relationship (like a domestic partner, relative of the domestic partner, individual engaged to marry the borrower, former relative, or godparent).
- Sale of an asset: If a home buyer has recently sold an asset, such as a car or another property, they can use the proceeds from the sale towards a down payment.
- Inheritance: If a home buyer has received an inheritance, they can use some or all of it towards a down payment.
- Line of credit or personal loan: A home buyer can use a line of credit or personal loan to make a down payment, but keep in mind that this may increase their debt-to-income ratio and affect their ability to qualify for a mortgage.
It’s important to keep in mind that some sources of funds may require additional documentation or proof of their legitimacy. For example, if you’re using a gift from a family member, you’ll likely need a letter confirming that the funds are a gift and not a loan.
What sources of down payments are not allowed?
Money is money, right? Unfortunately, in the world of home financing certain sources of funds are not allowed for use as a down payment.
- Cash from an undocumented source: Any funds that cannot be traced to a verifiable source are not allowed. For example, cash that is not deposited in a bank account or has no paper trail is not acceptable.
- Credit card cash advances: Using a credit card cash advance to fund a down payment is generally not allowed by lenders.
- Payday loans: Payday loans are not an acceptable source of down payment as they are short-term loans that often have high-interest rates and fees.
- Borrowed funds from a non-immediate family member: While gifted down payment from immediate family members is allowed, borrowed funds from non-immediate family members or friends are not accepted by most lenders.
- Unsecured personal loans: Unsecured personal loans, which do not require collateral, are not an acceptable source of down payment.
An experienced lender should review the acceptable sources of a down payment in the application process to avoid delays and disappointment down the line.
Pros and cons of making a larger down payment?
Pros of a larger down payment:
- Lower monthly mortgage payments: By making a larger down payment, you can reduce the amount of money you need to borrow, which means lower monthly mortgage payments.
- Lower interest rates: A larger down payment can also help you secure a lower interest rate, which can save you money in the long run.
- More equity in your home: A larger down payment means you’ll have more equity in your home from the start, which can be beneficial if you need to sell your home quickly or want to refinance in the future.
- Better loan terms: Lenders may be more willing to offer you more favorable loan terms, such as lower interest rates, lower PMI (private mortgage insurance) or waived fees, if you make a larger down payment.
Cons of a larger down payment:
- Less cash on hand: By putting more money towards your down payment, you may have less cash on hand for other expenses, such as closing costs or unexpected repairs.
- Opportunity cost: By tying up a large sum of money in your home, you may miss out on other investment opportunities that could potentially earn you more money in the long run.
- Longer savings timeline: Saving up for a larger down payment can take longer, which may delay your plans to purchase a home.
What loan types require the smallest down payment?
In California, you have several mortgage loan types to choose from that require small down payments. Let’s take a look at each of them:
- FHA loans: With a minimum down payment of just 3.5% of the purchase price, FHA loans are a popular choice for first-time homebuyers. They also have less strict credit score and income requirements compared to other loan types.
- VA loans: If you’re a veteran, active-duty military personnel, or part of a military family, you may be eligible for a VA loan with no down payment required. VA loans typically have lower interest rates and less stringent credit score requirements as well.
- USDA loans: The USDA offers loans for homes in eligible rural and suburban areas with no down payment required. USDA loans also have lower interest rates and more flexible credit score requirements. However, USDA loans have specific property locations requirements and income limits.
- Conventional loans with private mortgage insurance (PMI): Although conventional loans usually require a down payment of at least 5%, you can put down as little as 3% with the addition of PMI. Keep in mind that PMI protects the lender in case you default on the loan and typically costs between 0.3% to 1.5% of the loan amount annually.
It’s worth noting that these loans may come with additional fees or higher interest rates, so it’s essential to carefully consider your options and work with an experienced lender to find the best loan type for your unique situation.
Does down payment size matter to the seller?
As a first-time homebuyer, you may be wondering if the size of your down payment matters to a seller. The short answer is yes, it can. A larger down payment can signal to the seller that you are a serious and financially stable buyer. This may give them more confidence in accepting your offer over another buyer who is offering less money upfront.
However, it’s important to remember that the size of your down payment is just one factor in the homebuying process. Other factors, such as your credit score and the terms of your offer, can also be important to the seller.
Does down payment size matter to the lender?
When it comes to getting approved for a mortgage, the size of your down payment can make a difference in the eyes of the lender. Generally, the larger your down payment, the less risky you are to the lender, and the more likely you are to get approved for a loan with a lower interest rate.
However, that doesn’t mean you need to have a large down payment to get approved. There are still options available to you, such as FHA loans or conventional loans with private mortgage insurance (PMI), that allow for smaller down payments.
Ultimately, what matters most to the lender is your overall financial situation and ability to repay the loan. They’ll look at factors like your credit score, debt-to-income ratio, and employment history to determine your eligibility for a mortgage.
So, while a larger down payment may be preferred by some lenders, don’t let that discourage you. With the right preparation and guidance, you can find a loan option that works for your unique situation and helps you achieve your goal of homeownership.
How does your credit score affect your down payment requirements?
Your credit score can have an impact on your down payment requirements when you’re looking to buy a home. Generally speaking, a higher credit score can lead to a lower down payment requirement.
For example, if you have a credit score of 580 or higher, you may be able to qualify for an FHA loan with a down payment of just 3.5% of the purchase price. However, if your credit score is lower than 580, you may need to put down 10% or more.
Similarly, if you’re looking to get a conventional loan with a lower down payment, you’ll typically need a higher credit score. For example, a down payment of 3% on a conventional loan may require a credit score of 620 or higher.
Overall, having a higher credit score can make it easier to qualify for a mortgage with a lower down payment requirement. That’s why it’s important to monitor your credit score and take steps to improve it if necessary before applying for a mortgage.
Remember, there are always options available to you, even if your credit score isn’t perfect. With the help of a knowledgeable lender, you can explore different loan types and find the one that’s best for your unique financial situation.