Owning a home has proved to be the surest way to build wealth over the last decade, and the price of admission to real estate riches has steadily dropped.
While buyers once were required to first save up a down payment, mortgages for up to 100 percent for a home’s purchase price are now readily available. Home buyers who didn’t have savings have been able to buy a home and then watch their wealth build as the value of their house has risen.
But as housing prices threaten to soften — at least in some locales — does it still make sense to take on a mortgage for all or nearly all of the price of a home?
Though buyers have reason to more carefully consider the price they’re paying, experts don’t expect any downturn in 100 percent financing. In fact, lenders will probably keep expanding no-down-payment and very-low-down-payment options, says Tom Smith, senior product manager at Fannie Mae, a government-sponsored company that buys mortgages from lenders. Moreover, although a recent report by the Office of Federal Housing Enterprise Oversight finds that the appreciation of home values nationwide slowed during the third quarter of 2002 — with a number of markets actually seeing prices fall — sale prices for homes in the Chicago area are still growing above the pace of inflation, says Shelly Dreiman, a senior economist with the oversight office.
A major metropolitan area like Chicago with a diverse job market is somewhat insulated from dramatic price declines, experts say. “Housing values usually fall below mortgage values when the local economy collapses and young families need to move away to find work,” says Eric Belsky, executive director at the Joint Center for Housing Studies at Harvard University. Still, lenders are tightening appraisal standards to ensure that they are not lending more than the fair market value of a home, says Rob Hardman, division president of Primera Mortgage in Chicago and president of the Illinois Association of Mortgage Brokers. “Many lending companies are requiring review appraisals,” he says. These review appraisals involve computerized systems stocked with data on home prices in various locales that lenders use to check on a particular appraiser’s opinion.
Higher quality appraisals should protect all buyers from paying too much, and are especially crucial for buyers taking on a mortgage for the full purchase price, Hardman notes. Buyers with access to the Internet should conduct their own informal appraisal by logging on to the many real estate sites offering price information on recent home sales, Dreiman suggests.
While a number of low- and no-down-payment programs are available, borrowers must also remember they will be required to pay “private mortgage insurance,” or PMI, if they put down less than 20 percent of the purchase price, says Walter Krajewski, president of Mortgage Specialists of Illinois, Lombard. The lower the down payment, the higher the PMI charge, Krajewski notes. “If you get a $100,000 mortgage with 5 percent down, you’ll pay about $65 a month in PMI. If you don’t make any down payment, you’ll pay about $88 a month.”
Many buyers favor government-insured FHA mortgages, which don’t require PMI, Hardman adds. Usually, borrowers must make at least a 3 percent down payment with an FHA loan, but the government has decided to let non-profit groups provide the entire down payment for the borrower, Hardman explains. Under these arrangements, the seller of the property gives the non-profit a contribution in the amount of the down payment, and the non-profit then turns the money over to the buyer.
“What you have to keep in mind,” Hardman cautions, “is that most houses usually sell for about 97 percent of their asking price. So, if you’re buying a $100,000 house under one of these non-profit programs, the seller is really getting $97,000 because he’s contributing the down payment. The seller is netting $97,000, but the buyer has a $100,000 mortgage. So the catch is that the property has to be worth $100,000, not $97,000.”
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