Understanding Market Changes: What Homebuyers Can Expect in Today’s Market
As we approach the end of 2022, it feels like we are also closing the chapter on the pandemic crazed real estate market. The intense buyer pool we saw over the last two years has dwindled because of inflation and high interest rates. During this time, sellers became accustomed to multiple offers, many of which were significantly over asking price. Unfortunately, the trend of inflated prices may continue into 2023 due to the low inventory in the Hudson Valley. Consequently, homebuyers are hesitant to purchase properties at inflated prices as the interest rates continue to climb.
While there is never a perfect time to buy a house, just like there will never be “the perfect house”, the dream of homeownership is still a very real possibility even in this changing market. For renters, finding a new rental property in today’s market may be even tougher than finding a home to purchase. Changes in New York’s rental laws, along with pandemic protection for renters, have seemingly resulted in less availability of rental properties. As a result, market rent has increased, driving qualified renters to purchase homes where their monthly mortgage payment is equivalent to or even less than market rent.
As the market adapts to the changing economy, it is important for homebuyers to understand their options, especially when it comes to financing.
One of the biggest questions we hear is: how much do I need for a down-payment? To answer that question, it is important to understand what exactly a down-payment is and how it affects your mortgage. As a general notion, the down-payment amount may be dictated by what type of mortgage you choose. One size does not fit all, and it is important to work with a knowledgeable lender to decide what type of mortgage works best for you. There are some conventional loans that require as little as 3% down. There are also a variety of loans that require zero money down. Government-backed USDA and VA loans oftentimes allow a homebuyer to purchase a home with zero money down (100% financed). Homebuyers with less than stellar credit also have an option of applying for a government-backed FHA loan (insured by Federal Housing Administration) with as little as 3.5% down. For an example of down-payments based on loan programs, see the chart below.
| Loan Type: | Conventional Loan Based on $350,000.00 Purchase Price | VA or USDA Loan Based on $350,000.00 Purchase Price | FHA Loan Based on $350,000.00 Purchase Price |
| Minimum Down Payment: | $10,500.00 | $0.00 | $12,250.00 |
| Loan Amount: | $339,500.00 | $350,000.00 | $337,750.00 |
Although this shows the difference in how much cash is needed for a down-payment, it is important for homebuyers to explore other closing costs and monthly costs (like Private Mortgage Insurance) with an experienced lender prior to deciding. Additionally, with interest rates rising, lenders may encourage homebuyers to consider adjustable-rate mortgages (ARMs). Adjustable-rate mortgage rates are often lower than fixed rates and typically adjust throughout the loan term. An adjustable-rate mortgage may make sense when you plan to pay off your mortgage (by sale, refinance or otherwise) in a short amount of time or you anticipate the interest rates to decrease soon.
Homebuyers should understand that the down-payment being calculated for their mortgage is NOT the same as the down-payment being paid upon signing of a formal purchase contract. Unfortunately, the same term is used to refer to both payments. The down payment paid on the signing of a purchase contract is the sum of money binding the purchaser to the transaction. This sum is held in escrow, typically by the seller’s attorney, and in the event of a default, the purchaser may forfeit this sum to the seller as damages for the purchaser’s default. When making an offer in this changing market, homebuyers should consider a lower contract down-payment to limit their damages in the event of a default.
Another concern for homebuyers is whether the offered purchase price is equivalent to the actual value of the property. The lender will conduct an appraisal of the property during the loan process and typically will lend only about 80% of the appraised value (the “loan-to-value” percentage). Many homebuyers over the last couple of years decided to waive appraisal contingencies to get their offers accepted. This placed additional risk on the purchaser in the event the appraised value came in lower than the purchase price. In this scenario, the purchaser would be responsible for “making up the difference” by bringing additional cash to closing or risking the loss of their down payment. With the shifting market, homebuyers should really consider the value of the lender’s appraisal and how it can impact their loan, equity, etc.
Again, although there is never a “perfect time” to purchase a home, with the right knowledge and professionals on your team, you can make the dream of homeownership a reality even in the current Hudson Valley market.
This is not intended to be legal advise. You should contact your attorney to discuss your specific situation.
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Jessica M. Mahoney, Esq. is Partner at the firm and practices real estate.
She can be reached at 845-764-9656 and by email.[/column] 
