Buyers came out in droves this year to take advantage of record low mortgage rates. This led to a high demand, super competitive real estate market throughout the nation. But several trends in financing a home purchase are underway, making it critical for future buyers to understand the fundamentals that could affect their purchase decision.
1. Rates Will Rise
As inflation rises with a strengthening economy, interest rates below 3% aren’t expected to last long. Some economists are expecting 30-year fixed rates to climb to an average of 3.5%. While that may not seem like a lot to some, it can mean the difference between buying and being pushed out of the market for others, especially with rising home prices.
2. Strict Lending Standards Won’t Ease Much
During the pandemic, loan qualifications tightened as lenders sought to avert risk. These could ease as refinancing becomes a smaller portion of all lending. However, the most favorable rates will continue to go to borrowers with credit scores of 750 and above and those with larger down payments. The second-home market may see steeper rates due to stricter underwriting criteria.
3. Home Prices Will Increase, Causing Higher Loan Amounts
The median price of a home in June 2021 was a record $363,300. That’s an increase of over 23% compared to 12 months ago. As demand continues to exceed supply, home prices will continue to rise. That means people will need to borrow more to afford a home. As families upsized their homes in the face of a pandemic, sales in higher-end price tiers actually outpaced lower priced ones. Loan applications for mortgages over $750,000 jumped to 55% higher than the previous year.
4. Nonbank Lending Will Gain More Share of Home Mortgages
Borrowers have options and that includes looking outside of traditional banks for a mortgage. According to Business Insider Intelligence’s Online Mortgage Lending Report, the top five U.S. banks (Bank of America, JPMorgan, Chase, Wells Fargo, US Bancorp, and Citigroup) made up only 21% of total mortgage originations in the past year. That’s a decrease from their 50% combined market share a decade ago. Nonbanks, also known as alt-lenders, can offer traditional financial products with relaxed eligibility requirements and digital options in loan processing. Quicken Loans (now Rocket Mortgage) is currently one of the top alt lenders, which issued the highest dollar amount of single-family loans in 2020.
5. Low Rates Will Affect the Supply Squeeze
Many home owners are holding on to their current home because they simply don’t want to give up an existing low interest rate. The know they would have to pay more for the same type of home they currently own and may not qualify for the same low rate. When such a large quantity of families and individuals decide to stay rather than move, it squeezes the housing supply and continues to drive up prices. But buyers need to remember that mortgage rates are certainly not the only factor that potential sellers consider. Many decide to sell out of desire for more space or a new location or for one’s job.
Real Estate Term of the Week
Alternative Lending: Are usually online-based, private companies that operate like the lending arm of a bank, but they are not traditional banks. Unlike banks, which usually require a slew of financial documents in the application process, alternative lenders typically only need one’s credit score and most recent tax returns and bank statements. Algorithms rather than people are used for underwriting loans. Because of convenience, speed, and more flexible qualification standards, alt loans typically have higher interest rates than traditional banks.