10 Years After the Crash: What You Need to Know About Buying a Home Now
It's been a decade since the Great Recession, triggered by the subprime mortgage crisis and lax lending standards. After the economic downturn during which many people lost their homes, the federal government poured $830 billion into the U.S. economy in an attempt to correct the devastation. In the real estate market there have been a handful of changes designed to protect against such a crisis again, yet many things have stayed the same. Industry experts talked with Cheapism about what's new in home buying and what remains unchanged.
Securing a mortgage is no longer an easy process. Far from it. In fact, it is such an arduous task, filled with so many requirements and reviews of one's day-to-day spending and overall financial picture that it can often be maddening for potential homebuyers. "Every single detail is documented and verified now by third-party verification. We are checking your pay stubs, taxes, and verifying employment to make sure everything matches up," explained Jennifer Beeston, vice president of mortgage lending at Guaranteed Rate Mortgage. "Lenders are definitely crossing every T and dotting every I."
Programs aimed at those who do not have a significant down payment, or who have zero down payment, still exist. "There is still the ability to purchase a home with no-to-low money-down," said Teddy Shonka of HomeSmart Elite Group. "This is very common for first-time homebuyers. But a borrower with no or low money down will still be required to have a steady income, above average credit (typically 640 or above), and a debt-to-income ratio that is sufficient for their specific loan program."
Recent advertisements make it seem like it's possible to obtain a loan with a simple click of a button. But in reality all lenders still require documentation, and the process can be painstaking. "Do not take any request personally or get mad if the lender requests additional documentation," explained Jennifer Beeston of Guaranteed Rate Mortgage. "Many items can lead to another item being needed. For instance, if we look at your bank statements and you have a $100,000 deposit, we have to ask you where that came from. That's not us being picky, but us just following the rules."
In most markets, home prices are now above the peaks that were hit in 2006, 2007, or 2008, depending on where you were located, says Bruce Ailion of RE/MAX Town and Country in Atlanta. "After many years during which real estate never declined in value, we are seeing more speculation in real estate as an asset class," explained Ailion. "The lesson learned is, do not buy unless you're willing and will be able to survive a decline in value." The idea that housing prices can climb anywhere from five percent to eight percent, while wages grow at one or two percent, is unsustainable and will result in a bubble in housing, Ailion said.
One of the most significant differences in the market now, compared to prior to the crash, is the shortage of properties on the market, said Ralph DiBugnara, president of Home Qualified and senior vice president at Residential Home Funding. "The inventory shortage continues to drive prices up based on lack of options, which has created bidding wars," said DiBugnara. "The inflated market before the crash was caused by over building, combined with looser product guidelines, which enabled buyers to spend more than they could afford."
New online platforms like TransferSafe allow for digital document upload, meaning borrowers can securely provide important documents electronically. This approach also establishes a record of what has been submitted, alleviating "the dreaded 'I swear I sent that' issue of the past," says Jennifer Beeston of Guaranteed Rate Mortgage. "Technology is really helping us move the ball forward. My average closing time is 15 days and this is due to tech and mindset."
Real estate brokers that charge a lower commission have become more prevalent over the last decade, says Leon Goldfeld of Yoreevo. As a result, buyers should be sure to ask their broker to lower their commission. If the broker isn't willing to do so, find another one to work with who already has a low commission.
Remember when getting a mortgage involved photocopying months of bank statements to provide to your mortgage broker? Now technology is used to automatically verify a great deal of personal financial information, says Jennifer Beeston of Guaranteed Rate Mortgage. "We have AccountChek, where instead of a borrower providing two months of statements we can pull the information electronically. That sounds minor but one of the largest borrower complaints was providing bank statements." Your W2 statements and tax transcripts can now be ordered electronically as well.
While many things have changed in the real estate market over the past decade, most experts agree that some of the fundamental guidelines surrounding home purchases remain the same. Don't overextend yourself with a purchase. "Sometimes home buyers believe that they have to purchase a home equal to the amount they have been pre-approved for," said Nathan Garrett of Garretts Realty. Given that home prices are at an all-time high again and outpacing income levels, buyers looking to stay within budget may have to sacrifice some of the items on the wish list for a new home.
For those looking to purchase an investment property that can be used to generate rental income, there's no time like the present, said Ralph DiBugnara of Home Qualified. "As interest rates and prices rise, so will rental prices, but investors should be careful not to overpay." To make sure you don't overpay, DiBugnara recommends creating an affordable budget that will work for you even if the property becomes vacant. In addition, research the market rent for the area you're considering and make sure it will cover your projected mortgage payment.
When it comes to searching for a home, it is now possible to go online yourself and find all of the current listings, said Mike McElroy, founder of Center Coast Realty in Chicago. "Virtually every listing for sale on the market is able to be viewed by the public," he explained. "Ten years ago, the technology that provides this just wasn't as widely used by consumers or agents." Sites that guide hopeful homeowners to listings include Zillow, Trulia, and StreetEasy.
Even if you are using a realtor, it's still important to do your research on the current housing market. Those online listing sites can be valuable tools to help you obtain detailed information about properties. "Over the last decade real estate data has become significantly more transparent," said Leon Goldfeld, co-founders the real estate brokerage Yoreevo. "A savvy buyer should use this information to his or her advantage." The most important data to look for is recent transactions on comparable properties, which helps determine what the property you're seeking to buy may truly be worth.
Given how complex transactions have become, for many buyers, it may be critical to have a good realtor, says Mike McElroy of Center Coast Realty. "Before, realtors were basically gatekeepers of information who would hold the door open for buyers," said McElroy. "Now, our job description has shifted. we're homeownership consultants who are there for clients every step of the way to educate them on the market, navigate complex transactions, and negotiate tough deals."
For the majority of Americans, home ownership remains an attractive way to turn an expense into an asset or income producing vehicle, said Gill Chowdhury of Manhattan-based Warburg Realty. "Regardless of what happens with pricing, people needed to live somewhere," said Chowdhury. "Even with the recent tax reforms, home ownership, especially for the majority of Americans whose homes are well below the $500,000 mark, remains highly incentivized," he says, noting tax breaks remain available to homeowners. "Home ownership is still a very real way to build long-term wealth."
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