20% down versus FHA (agent, mortgage, accept, PMI)
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No it does not need to appraise for the contract price to get a loan.
Example:
House under contract for $500K. Buyer putting down 30% down ($150K cash). Loan needed will be $350K. All the bank cares is if the home will appraise for at least $420K. That way the $350K loan the buyer is taking out means it's worth at least 80% collateral to the banks.
Now it's totally up to the buyer whether they want the house at that point at that contracted price. Remember appraisals are still screwy these days. I got a very good deal on a home last summer because we were doing FSBO (both buyer and seller did not have agent) so the homeowner cut out easily 6% of what he could have gotten with an agent. The appraisal came back close to $40K less than the same 2 homes which closed within 6 weeks of the home I was buying. Same builder, same subdivision. But the appraisal decided to add a another distress property that had been on the market for 4 years to drive down the comps even though it was in a different subdivision and different builder.
It's like they purposely try to appraise it as low and close to my current contract price. And it's a shame. Appraisal should not have access to the contract price. They can fudge it anyway they want. And in my case, I complained to the bank cause the appraisal lied on the square footage of the distress property to make it without 10% square footage so he could include it. They never answered my phone calls or emails cause I called them out.
I put more than 20% down so it was a mute point.
Exactly!! You're right on!!
The appraisal process really irks me. One appraiser can appraise a house at $500K, and the next one will appraise it at $400K. It really is just their opinion.
But, if the sale price is $500K and the buyer is putting down 50%, all the house needs to appraise for is $250K for the loan to be approved.
Your scenarios aren't the greatest because if someone goes FHA, why would they put more than the required 3.5% down? If they do 5-10%, they would be doing a conventional loan just like the 20% down person.
Falcon, I always thought that if you didn't have 20% to put down, you could not do a conventional loan.
I thought FHA was the only way to go with a down payment of less than 20%.
Sorry guys ... I must not have worded it right, because I didn't get my point/question across right.
The point of the post was would you rather put down the $200K knowing it makes you a stronger buyer, and you'll have a smaller mortgage payment?
Or, put down a much smaller down payment, knowing that you might get passed over several times before finding a house you like ... but you will put the extra $$$ in the bank should the market go down and you're in a screwed situation on the house?
For those that don't know the market out here (as well as other areas of the country) there were people that bought houses out here in 2006 for $800K and now they barely appraise for $500K. A lot of those folks make their mortgage payments and stay because they have no choice, and they put down a huge chunk of cash to get into their homes. As well as, they might be locked into higher interest rates, with no way to lower their payment. And, with the new law ... unless your mortgage was with Freddie or Fannie, you cannot refinance to try and get your payment down, because these are considered jumbo loans.
I'm just trying to figure out from a financial point of view, which one is the better strategy.
HUGz! Jules
From a strictly financial point as a buyer it's always better to put as little down as possible especially when you can get a similar loan term as someone putting down much more. That money you put down into a home is considered "dead money" until you extract it out. So someone putting down 200K on a $500K home is tying up valuable cash that can be reinvested elsewhere that could potentially make a 5-6% safe return (like preferred stocks that pay hefty dividend) and maintain liquidity.
The issue these days is risk assumption.
California is a non recourse state so it's always to the buyer's advantage to put as little as possible because under most circumstances with the primary home, the homeowner can walk away from the mortgage with very little financial consequences (except bad credit). But who cares; would you rather have to be liable for $300K under water mortgage or walk away and just deal with bad credit for a few years. Credit doesn't matter if you are a high income earner for the most part. Just buy cars in cash.
As for a seller. Who would you sell it to? Someone putting more than 20% down or someone putting 3.5% down. Again that all depends. The bottom line is still the bottom line. If I am concerned about the buyers who can barely come up with the necessary cash for a 3.5% down; I may take the offer that's 1-2% off my target price knowing I could close easily with a buyer with more money down instead of wasting my time with someone putting 3.5% down who may not get financing.
The appraisal process really irks me. One appraiser can appraise a house at $500K, and the next one will appraise it at $400K. It really is just their opinion.
But, if the sale price is $500K and the buyer is putting down 50%, all the house needs to appraise for is $250K for the loan to be approved.
So, aneftp, did you get the house?
HUGz! Jules
Yes, we closed on home within 4 weeks of contract.
I was a little different. My home is really worth at least $580K. I got it for $540K cause the seller was FSBO. We didn't use any agents. Motivated seller. He wanted to close quick and he knew I could close quick. That's why he gave me a very good price. The bank purposely under appraised the home for $545K right around the contract price. Even though 2 exact homes closed at $585K and $580K within 6 weeks of each other. (both around $145 sq foot). A couple of smaller homes in same subdivision also closed for at least $150 square foot also within 4 weeks of my contract price. Same builder.
Appraisals are a complete joke at times. The banks obviously didn't want to appraise my home for $580K cause they didn't want it being much less than the contract price. So he ended up using some random home as a 3rd comp instead of the other smaller homes in my subdivision to drive the price down. And he lied on the square footage of the distress home so he could include it within the comps (homes comparable usually have to be within 10% square footage in our local area).
From a strictly financial point as a buyer it's always better to put as little down as possible especially when you can get a similar loan term as someone putting down much more. That money you put down into a home is considered "dead money" until you extract it out. So someone putting down 200K on a $500K home is tying up valuable cash that can be reinvested elsewhere that could potentially make a 5-6% safe return (like preferred stocks that pay hefty dividend) and maintain liquidity.
The issue these days is risk assumption.
California is a non recourse state so it's always to the buyer's advantage to put as little as possible because under most circumstances with the primary home, the homeowner can walk away from the mortgage with very little financial consequences (except bad credit). But who cares; would you rather have to be liable for $300K under water mortgage or walk away and just deal with bad credit for a few years. Credit doesn't matter if you are a high income earner for the most part. Just buy cars in cash.
As for a seller. Who would you sell it to? Someone putting more than 20% down or someone putting 3.5% down. Again that all depends. The bottom line is still the bottom line. If I am concerned about the buyers who can barely come up with the necessary cash for a 3.5% down; I may take the offer that's 1-2% off my target price knowing I could close easily with a buyer with more money down instead of wasting my time with someone putting 3.5% down who may not get financing.
I'd put down the 20% if you can. Not only will you generally get a lower interest rate, but you'll avoid paying PMIs and have the choice of not impounding your property taxes (if you decide not to).
We had to go FHA when we bought a townhouse 3 years ago. We vigorously paid down our mortgage and built a lot of equity (were fortunate to buy in the dip, here in the Silicon Valley). Between the lower interest rate, slightly lower principle balance and no more PMI's, we cut our monthly payment by $800.
I'd put down the 20% if you can. Not only will you generally get a lower interest rate, but you'll avoid paying PMIs and have the choice of not impounding your property taxes (if you decide not to).
We had to go FHA when we bought a townhouse 3 years ago. We vigorously paid down our mortgage and built a lot of equity (were fortunate to buy in the dip, here in the Silicon Valley). Between the lower interest rate, slightly lower principle balance and no more PMI's, we cut our monthly payment by $800.
Can you explain about the impounding of property taxes? I'm not sure what that means.
HUGz! Jules
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