Breaking News: Buyer Down Payments Increase

Kick us while we're down, why don'tcha!

Fannie Mae, a government sponsored enterprise involved in the secondary mortgage market, recently tagged San Diego (and many other areas of the nation) as a "declining market". Besides stating the obvious, what does this mean to you, me, and the market?

Buyers, even ones with excellent credit, will be hard pressed to find a loan. The days of 100% financing are gone, and across the board a minimum of 5% down payment will be required. That's an additional 5% on what you normally would have spent. If you qualified for a 100% program, you'll only get 95%. Investors, are you used to supplying a 10% down payment? Not anymore, you'll need at least 15%, possibly even 20%.

MY PREDICTION: The middle of the market ($350,000-700,000 or so) will see a drop in transactions, while the effect will be less for lower priced properties. Many first time home buyers can come up with the extra cash it takes for a down payment on a $175,000-225,000 condo. Some will do it by cashing out their 401k, others by draining their bank account. Previously, these buyers didn't buy because prices were so high that their monthly mortgage payments were more than their paycheck, and it had little to do with the down payment. Now, with prices lower the mortgage payment is manageable, even if they need to go "all in" with their chips. However, for buyers in the middle of the market the problem isn't making the mothly payments, it's that extra $20,000+ down payment money will be a deal killer. Not that they won't be able to afford it, they will just be less willing to zero out their bank account than buyers in the lower price range.

MY ADVICE: Be creative in your contract writing. Ask the seller to pay all buyer closing costs to minimize the out-of-pocket money a buyer needs. Use language like "recurring and nonrecurring closing costs" to ensure a buyer gets the full amount of the funds requested. Buyer's remember that sellers look at the net amount that they will receive and not the sales price, so figure out what you should offer without the closing costs, then adjust your purchase price upwards to offset the amount requested. Also, if you find yourself in a "mini bidding war" (see previous post) on a property with multiple offers, don't ask for closing cost assistance if you don't need it. When comparing two equal net offers, the buyer who needs less out-of-pocket assistance will look stronger and will get the property. Or, try increasing your deposit to 10% of the purchase price if you can afford it.