Because 2013 has been a year of continued recovery for the mortgage industry, I paid close attention to the home financing options available and the characteristics of the mortgage products offered. What I observed might shed some light on what we can expect from the mortgage market in the new year.
Plain vanilla will be the most popular flavor. The 30-year fixed rate mortgage (FRM) is by far the most popular type of financing, offering certainty in the form of long-term, fixed interest rates and predictable payments.
The 30-year FRM will likely continue to be popular in 2014. It is defined by certainty, and certainty is the key ingredient to stabilizing the housing market. The variables involved in consumer mortgages can cause confusion on the part of the borrower and concerns on the part of mortgage investors, so plain vanilla will likely continue to be the most popular and safest bet.
Unlike the mortgages offered before the housing crisis, lenders aren’t currently offering any bells and whistles or special features on mortgages because of the potential risks. During the crisis, a large number of the loans that ended up in default were those with adjusting options (large and sudden increases in monthly payments) that caused payment shock or second mortgages that had subprime rates (often twice the market rate) and features like prepayment penalties.
Down payments will be even bigger. In the transactions where I was the seller and saw multiple offers from buyers with financing, I was pretty stunned at how much money buyers were required to put down. Every buyer who made an offer had put at least 10 percent down, and many put down much more than that.
In fact, the real estate professionals with whom I worked and who see deals every day of the week told me that a lot of the 10 percent down deals were falling apart before closing. Because of this, the realtors saw a lot of risk in accepting an offer from a buyer who was, as they saw it, “only” putting 10 percent down on a loan.
This is a very sobering fact. Ten percent is a lot of money down, especially in high-priced markets or markets where home prices are quickly rising. It seems that would-be buyers who don’t have loads of cash saved or investments to leverage are, for now, completely sidelined from buying a house.
Regulations will make getting a mortgage more difficult. Many lenders are preparing for new regulations and, as such, are extra cautious about making loans with high loan-to-value (LTV) ratios.
Under the new regulations, lenders must only make loans that meet certain regulatory criteria and only if they’re sure that the borrower can afford to pay back the loan. These new regulations could make financing tougher to get in the coming year.
Options for getting a second mortgage will continue to be limited. In the past, many lenders had second mortgage products they could bundle with a first mortgage. These second mortgages basically acted like a down payment—if a borrower only had 5 percent cash for a down payment, the lender could make a second mortgage for an additional 15 percent and leave 80 percent to finance on the first mortgage.
These second mortgage products are almost impossible to come by in today’s market, leaving consumers with no choice but to either find more cash to put into the deal or to sit out.
Government financing will be expensive. Mortgage options available from FHA, VA, and USDA Rural can have favorable terms, but fierce competition for these mortgages may keep buyers from getting the home of their dreams.
One of the key benefits of government-backed loans is a low down payment. Some of these programs offer no or very low (3 percent) down payments and are therefore very attractive for first-time homebuyers.
But these low down payments can be offset by other costs. Borrowers pay mortgage insurance premiums in their monthly mortgage payments, and these payments act as a type of insurance—they’re put into a fund that is used in the event the loan defaults. The premiums on the FHA fund have been steadily increasing and, as a result, consumer payments are on the rise. These higher payments can be difficult to manage, even with a low down payment.
The combination of low down payments and higher insurance premiums mean some buyers are paying more on government-backed loans than they would be with non-government-backed products.
Cash will continue to be king. When my husband and I recently sold our property, we had multiple competitive offers from which to choose. We picked the cash buyer because we knew the deal would have no strings attached, no bank decisions to wait for, no appraisal necessary, and a quick closing time.
Low-stress, low-risk transactions like these make cash buyers more appealing to sellers, and cash sales make up a considerable percentage of real estate transactions.
In fact, while cash sales have dipped in markets where home prices are on the rise, all-cash purchases accounted for 49 percent of all residential sales nationwide in September according to RealtyTrac. In real estate markets where prices remain low and investor influence remains high, you may expect to compete with (and lose to) a cash buyer for the home of your dreams.
The bottom line
The dynamics of homebuying are changing dramatically, and proposed changes to regulations and the mortgage market could mean big differences for homebuyers. If you’re in the market for a new home in 2014, pay close attention to what is changing and how it will ultimately impact you personally.
While the housing reform you hear about may sound completely foreign to you on many levels, it could affect your ability to get the house you want.
Many of the proposed changes are very focused on the consumer angle of the mortgage process and on the products, tools, and methods available to consumers to buy a home. These changes, combined with high down payment requirements and increased monthly payments for government-backed loans, could have an adverse impact on many Americans—particularly younger generations and historically underserved populations, creating an even larger hurdle to homeownership for those groups.
Alanna McCargo is a housing and financial services executive and personal finance writer and advocate. She is a public speaker on hot topics in financial services and the housing market, and she writes a personal finance blog called “Matter of Money.” She is an active volunteer and serves on the board of directors for the Women in Housing & Finance Foundation, a non-profit dedicated to advancing financial literacy, housing policy issues, and education programs for women, children, and under-served communities. Follow Alanna on Twitter @myhomematters.