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Homebuyers are stretching their budgets and mortgage limits to win bidding wars

  • More buyers are stretching their budgets, putting less money down or using adjustable rate loans that offer lower rates.
  • Buyers today need to be not just pre-approved for a mortgage but have a mortgage commitment.
  • Borrowers have more options for low-downpayment loans, options that were not available as recently as just a few years ago.
Prospective buyers with their real estate agent survey the kitchen of a new home.
Matthew Staver | Bloomberg | Getty Images
Prospective buyers with their real estate agent survey the kitchen of a new home.

At a Sunday open house on a sunny spring day outside Philadelphia, only about a half-dozen families showed up to tour a $600,000 colonial.

The home was in a sought-after suburb with excellent schools and had just gone on the market the previous Thursday. The showing was lean, likely because more than two dozen potential buyers had already seen it immediately, and there were two offers pending.

That scenario is playing out in neighborhoods across the nation, as buyer demand soars and the supply of homes for sale sits at a record low.

"The frustration with the lack of inventory is, so many of the houses are going in bidding wars, and so you know you really have to step up to the plate and you have to do your homework to be a competitive buyer," said Patrick Clark, the real estate agent with Long and Foster showing the home.

Buyers today not only need to be preapproved for a mortgage, but they must also have a mortgage commitment. Home prices are hitting new highs and the gains are growing, just as mortgage interest rates are turning higher again. All of that has more buyers stretching their budgets, putting less down or using adjustable rate loans, or ARMs, that offer lower rates.

They are actually feeling emboldened to do so, thanks to the rise in the stock market and the improving economy.

"When they're more confident they are willing to stretch a little further," said Mike Graff, a mortgage consultant with Prosperity Home Mortgage. "I think that some people realize, look, they're not going to be in this house for 30 years, so moving to an ARM, when the rate is fixed for a period of time, they're definitely more comfortable with something like that to lower their payment or to kind of stretch their budget a bit, so we have seen an uptick in that."

Borrowers also have more options for low down payment loans, options that were not available as recently as just a few years ago. Fannie Mae reintroduced a 3 percent down payment loan that it had discontinued during the recession, and some private lenders are venturing back into subprime, although they're calling them "nonprime" loans. These are mortgages to borrowers with lower credit scores.

Higher debt-to-income ratios

After holding steady for two years, the share of conventional loans backed by Fannie Mae with down payments of less than 10 percent rose from 12 percent to 14 percent in 2017. The expectation is that it will be even higher this year.

"Availability of some low-down-payment loans is really much more widespread than previously, you're seeing things like debt-to-income ratios increase," said Mike Fratantoni, chief economist at the Mortgage Bankers Association.

Underwriting, he adds, however, is still quite conservative.

"Not the products that really led to big payment shocks in the last crisis," Fratantoni said.

Banks are also willing to take on more risk in the jumbo loan space. They hold these loans on their balance sheets.

"You could always put a low down payment on lower-priced homes, but once you start getting into that five, six, seven, eight hundred thousand-dollar price range, it typically was 20 percent, whereas now you can do 5 percent, so we are seeing that absolutely, especially within the past year, that has spiked up," said Prosperity Home Mortgage's Graff.

Rushing in as rates rise

The less skin in the game you have, however, the higher your rate may be, and interest rates are now rising again at a sharper clip than the past several years. This has some buyers rushing to get in before rates go any higher.

The Maher family of four is relocating from Florida to the Philadelphia area and have been searching for a home for about a month. So far, they've been surprised at how high prices are going, especially in bidding wars.

"Being in the budget has been a little difficult," said Mrs. Maher. "Everything so far has been pretty pricey, whether it's the house itself or the taxes."

They are now considering looking further outside the city where prices are lower.