Why wait for a good thing?
Through most of this decade, a good thing–quickly building real estate riches–came to those who didn’t wait to buy a home.
So what if you had no savings for a down payment?
The “buy now and prosper” logic was irresistible: Get financing to cover the cost of a home and watch your piece of the booming market keep jumping in value.
The booming market has lost some steam, but some still subscribe to the “buy now, nothing down” logic.
“We are seeing 100 percent financing all the time,” says Pat Vlasis, president of American Way Financial in Oak Lawn.
“Everyone in this area is eager to get on the housing train,” she says. Some home buyers “will never be able to save 5 or 10 percent down.”
The buyers in the south suburban market that Vlasis serves are generally optimistic about continued price appreciation in single-family homes, she says.
However, many of the firms that fund mortgages are showing more caution in extending financing for the cost of condominiums Vlasis says.
When lenders approve a condo loan, she says, they want to see the sale price of a unit match a recently sold comparable unit.
“If someone from the building lowers the price to sell the condo right away, that throws everything off.”
Even when buyers have good credit, Vlasis says she’s seen some lenders reject applications for 100 percent condo financing.
Whether you’re buying a house or a condo, reconsider buying with little or nothing down, experts warn. If home prices flatten or decline, fully leveraged homeowners would be left with a mortgage that’s bigger than what they could net from a sale.
In that situation, more owners default and suffer with a credit record stained by foreclosure, says Kerry Vandell, a finance professor at the Center for Real Estate at the University of California at Irvine.
If owners patiently continue living in their home waiting for prices to rebound, they won’t suffer any financial loss, Vandell says.
Some owners, however, may encounter circumstances that force them to move.
No one wants to sell a house for less than they paid for it. But for those who make a substantial down payment, there’s likely to be enough in proceeds to pay off the mortgage.
It’s first-time buyers who don’t have profits from a previous home who are most likely to put nothing down. That’s why the issue of whether to buy without a down payment dovetails with the question of whether to buy or rent.
Vandell suggests tallying the annual costs of each option.
On one side is the annual rent, and on the other is the cost of property taxes, homeowner insurance, maintenance and mortgage.
One side will add up to be the expensive option–for now.
You’ll also have to factor in probable rent increases, and how much you could gain or lose in home value over the period you’ll be living there, Vandell says.
Problem is, no one knows for certain where prices are headed. Although individual markets have seen downturns, Vandell says, over the long haul housing prices across the nation tend to appreciate at a rate slightly higher than inflation.
The longer you live in a home, the more likely it will see some appreciation.
“One of the first questions we ask [home buyers] is whether they are confident they will be there for a while,” says Jerry Behnken, loan officer and sales manager, Aspen Mortgage Corp. in Naperville.
The best course, Vandell says, “is to acknowledge the financial consequences” should your plans change and to develop a strategy for dealing with a possible housing downturn.
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Address questions to Financing, Chicago Tribune Real Estate, 435 N. Michigan Ave., 4th Floor, Chicago, IL 60611. You may also e-mail realestate@tribune.com. Sorry, Marilyn Kennedy Melia cannot make personal replies.
