Recognizing the strength of the real estate market, the Federal Housing Finance Agency (FHFA) recently increased the maximum amount for conforming loans to $647,200. This represents an approximately 18 percent increase from 2021.
What this means for a buyer in Wilmington is a substantial uptick in buying power, since it’s now possible to only put five percent down on a home with a purchase price of around $647,000 and still access historically low interest rates. In previous years, this would have been a jumbo loan scenario and the interest rate would have been higher.
This is a welcome update because the lack of inventory, price appreciation and press that has been surrounding the Fed’s projected increases in interest rates this year have been making it difficult for buyers to find a suitable home, much less close on one successfully. It’s hardly news but still worth pointing out that buyers are competing with many other buyers for well-priced homes, and the vast majority of listings are closing over asking.
What this equates to in many instances is that a buyer finds a home near the top of their price range. The result of the subsequent bidding war and negotiations is often a contract price that is substantially higher than the amount the buyer was approved to borrow.
In this situation, if the required appraisal scheduled by the lender comes back at an amount that is lower than the contract price, the buyer will suddenly have to face unsettling news: that they will have to come up with significantly more cash than they anticipated or have the home fall out of contract and forfeit their due diligence money.
To be competitive, most agents are advising buyers to offer substantial due diligence fees. These fees go toward the purchase price if the buyer is able to close successfully and are like a convenience fee for sellers, who get to keep the funds if the deal falls apart due to the fault of the buyer.
In prior years, due diligence fees were often just a few hundred dollars. Now that they are often in the thousands, it’s easy to see why a buyer would not want to risk losing the money.
Luckily, we are able to adjust the loan-to-value ratio in most situations so that the buyer does not have to come up with significant added funds to keep the deal intact. So, in the case where a buyer is putting down 20 percent on a 30-year fixed rate mortgage, then suddenly gets the awful news they will have to bring more funds, we can change the down payment amount to as low as three percent, for first time buyers, or five percent for most others.
The result is typically a very minimal impact on the buyer’s monthly payment, very insignificant in comparison to the pain of forfeiting thousands in due diligence fees and the inconvenience of having to start all over in the home search process. This would allow the buyer to hold onto most of the funds they had saved for the 20 percent down payment to use for repairs, renovations or even a vacation.
All of us are committed to do everything we can to help our buyers find a home and close successfully. With that in mind, we are a local team that works with local appraisers—the idea being that locals understand the nuances of their market better than anyone and have a vested interest in seeing its continued growth and success.
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