If Your Community Has Been Hit Hard By Foreclosures
If a large percentage of the homes for sale in your community are foreclosures, then something strange may be happening.
It may now be cheaper to purchase a home than it is to pay rent. And, since the banks are reportedly easing up on the requirements that kept so many out of the housing market in the past couple of years, it may be just about as easy.
This situation has come about for several reasons. The first, of course, is that housing prices have tumbled. In some of the hardest hit areas, such as Phoenix, homes are priced at less than 40% of their 2005 values.
Next, interest rates are at historically low levels. I read a few days ago that they have not been this low since Eisenhower was in office.
So even if buying isn’t cheaper than rent in your community, it’s still a very good idea. These prices and interest rates won’t last forever.
But now think about this: As more people lose their homes, more people need homes to rent. That means more competition for the rentals available in your town, and unless people begin moving away, that isn’t going to change soon.
People who sold their homes through short sales will generally be eligible for a new mortgage loan in two years, while those who went through foreclosure may have to wait 5 years to get a new loan.
Some may see it as hard-hearted, but those rental owners are quite naturally going to raise their prices in answer to the demand. For one thing they’ll make better profits. For another, it’s a commonly held belief that the higher the rent and deposit, the better care a rental unit will get from its occupants.
Thus, as leases expire, renters in your community could well be facing increased rents.
What about down payments?
Since the credit crunch hit and banks began tightening up on requirements, more buyers are turning to FHA insured loans. In fact, in 2007 only 3% of home mortgages were FHA – now that share has risen to 30% – because of the low down payment requirement.
Your buyers can get in with just 3 ½% down, and sellers are allowed to contribute a portion of that. Meanwhile, if they rent, they’ll usually pay the first and last month’s rent, plus a hefty deposit.
The news is that banks are also easing up on credit score requirements – so that once again buyers with credit scores in the 600’s will qualify for loans.
One more risk of renting…
Just because a person owns rental housing doesn’t mean their finances are in good shape. If they’ve lost a job or had some other financial crisis, they may be using their tenant’s rent for living expenses rather than making the payment.
Tenants run the very real risk of learning that the house they live in has been foreclosed upon and they need to move – ASAP.
Why not determine how loan payments compare to rentals in your community?
Choose a properly priced home that will qualify for FHA financing and figure out the down payment and the subsequent mortgage payment. Include taxes, homeowner’s insurance, and mortgage insurance.
Then find a house for rent that compares closely in size, amenities, and condition and find out what it rents for. While you’re at it, learn how much the deposit is and what the living restrictions are. For instance, can they have a dog or put up a basketball hoop for the kids?
Then turn your research into a chart that will show prospective buyers the difference between renting and buying.