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In today’s real estate market, there are many factors driving higher prices: strong demand, and an overall lack of inventory further fueled by lack of new construction. Fortunately, mortgage rates continue to be low, which continues to make homes affordable for many buyers.
While much of the conversation focuses on high demand, little attention has been paid to the role of rates in the residential market, in no small part because they are generationally low. That said, even a small difference in rates can push homes out of reach for many buyers.
For instance, the price of single-family homes in South Florida has become unreachable for most first-time buyers or younger buyers. We are beginning to see a great deal of interest in condos for this market segment, as there are still good opportunities available.
But let’s say that someone is interested in a $200,000 condo. The monthly principal and interest on 30-year mortgage would be $843 at the current rate of 3 percent. However, that payment would rise to $954 per month if mortgage rates rose to 4 percent. That difference of $112 may literally force someone out of the ability to purchase as they may not qualify, or be able to manage a higher monthly payment. Still, the news in the mortgage market is resoundingly positive for most buyers, and that is particularly true for first-time buyers.
In June, the U.S. Department of Housing and Urban Development announced changes to the way the Federal Housing Administration (FHA) calculates student debt, making easier for some low- and moderate-income borrowers to obtain an FHA mortgage. Prior rules overestimated student loan payments, limiting the ability to lenders to underwrite an FHA mortgage. (1)
Addressing the challenges
Despite the advantages of low mortgage rates, South Florida buyers face significant challenges, including a severe shortage of inventory, particularly for relatively affordable homes. Buyers from the Northeast, California and the Midwest are snapping up single-family homes and condominiums almost as soon as they are listed for sale.
As a result, many sellers today are getting multiple offers, leading to sales at or above listing prices. Buyers who fail to act quickly often lose out in a bidding war.
From a lender’s perspective however, that rapid escalation of values poses an additional challenge for buyers. One of the steps in the loan approval process is obtaining an appraisal to satisfy the underwriting criteria for a mortgage. However, appraisals typically reflect recent sales, which can be significantly lower than current values in a rising market.
For example, a buyer might agree to buy a home for $400,000, only to find that the appraised value is $375,000. In order to obtain a mortgage loan that buyer might need to add $25,000 to the down payment in order to make up the difference. In any case, appraisal-related issues can slow the approval process, and delay the closing, so it is important to maintain that variable in the overall equation.
Advice for buyers
Faced with these challenges, buyers should prequalify for a mortgage loan and obtain a preliminary commitment from a lender. It’s important to note, that although buyers may be prequalified, it doesn’t solve the issue of the appraisal process and overpriced homes. Institutions cannot issue a mortgage if previous comps are drastically below what the seller is asking for.
Another strategy would be to line up potential sources of additional funds in case the appraised value of the home falls below the sales price. Being able to make larger down payments can be a crucial step in closing the transaction.
At this point, it appears that mortgage rates will continue to be well below historic levels for at least the rest of the year. Sooner or later, demand will lessen for South Florida homes, making it easier for buyers who rely on traditional financing to make a successful offer.
Howard Levine is executive vice president and chief revenue officer at Amerant Mortgage, LLC in Fort Lauderdale.
