Over 10% of all residential homes are purchased by investors, and that number continues to rise. Who are these investors? Many have speculated that large institutional conglomerates such as Blackstone, American Homes 4 Rent, and Colony Starwood dominate investor purchases. However, a special report on investor home buying by CoreLogic, Don’t Call it a Comeback: Housing Investors Have Been Here for Years, shows this is not the case. Ralph McLaughlin, CoreLogic’s Deputy Chief Economist and author of the report, explained his findings at the recent National Association of Real Estate Editors conference in Austin: “Investor buying activity in the U.S. is at record highs. And our records go back confidently, about 20 years… What’s going on and why? Well, it turns out, it’s not the big institutional guys that are leading the increase in home buying. It’s actually the smaller guys. It’s those that have bought between one and ten properties over this 20-year period, they’re the ones that are really leading the increase in investor home buying.” Here is the breakdown of the percentage of purchasers by type of investor over the last six years according to the report: As the graph shows, the percentage of “Mom & Pop” investors is currently dominating the number of homes purchased by investors, as the percentage of homes purchased by both professional and institutional investors is falling.
If you’re currently renting and have dreams of owning your own home, it may be a good time to think about your next move. With rent costs rising annually and many helpful down payment assistance programs available, homeownership may be closer than you realize. According to the 2018 Bank of America Homebuyer Insights Report, 74% of renters plan on buying within the next 5 years, and 38% are planning to buy within the next 2 years. When those same renters were asked why they disliked renting, 52% said rising rental costs were their top reason. The results of the survey can be seen here: It’s no wonder rising rental costs came in as the top answer. The median asking rent price has risen steadily over the last 30 years, as you can see below.There is a long-standing rule that a household should not spend more than 28% of its income on housing expenses. With nearly half of renters (48%) surveyed already spending more than that, and with their rents likely to rise again, it’s never a bad idea to reconsider your family’s plan and ask yourself if renting is your best angle going forward. When asked why they haven’t purchased a home yet, not having enough saved for a down payment (44%) came in as the top response. The report went on to reveal that nearly half of all respondents believe that “a 20% down payment is required to buy a home.” The reality is, the need to produce a 20% down payment is one of the biggest misconceptions of homeownership, especially for first-time buyers. That means a large number of renters may be able to buy now, and they don’t even know it.
Do you Pay Taxes? The IRS allows an exclusion on the capital gains earned on the sale of a home if you meet certain requirements. If you’ve gone through a divorce or your spouse died, you can count the time that your spouse lived in the home as a part of the required two years. If you were in the military, you can apply for an extension of the exclusion period. You can ask for a period of up to 10 years to satisfy the two-year requirement. This gives you a long time to fulfill the requirement while you are away doing your military service. Asking for a Reduced Exclusion If you don’t meet the above requirements due to circumstances outside of your control, you may be able to apply for a reduced exclusion. If you sold your house due to any of the following reasons, you may qualify: The amount of the exclusion you can claim is dependent on the time you lived in the home. For example, if you lived in the home for 1 year, that is half of the time, so you can get half of the exclusion. Knowing if You Have a Capital Gain Now, the bigger issue is figuring out your capital gain. It’s more than figuring out the difference between the price you bought and sold the home. First, you must determine the total amount you invested in the home. This means the purchase price plus any capital investments you made in the home. Did you make any renovations that added to the value or use of the home? This doesn’t mean minor things like painting the home or repairing a burst pipe. It’s things that prolong the home’s life, such as a new roof or change its use, such as adding a room. You will then need to deduct any of the following:
Your FHA lender will review your past credit history performance while underwriting your loan. A good track record of timely payments will likely make you eligible for an FHA loan. The following list includes items that can negatively affect your loan eligibility: -No Credit HistoryIf you don’t have an established credit history or don’t use traditional credit, your lender must obtain a non-traditional merged credit report or develop a credit history from other means. -BankruptcyBankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage. For Chapter 7 bankruptcy, at least two years must have elapsed and the borrower has either re-established good credit or chosen not to incur new credit obligations. -Late PaymentsIt’s best to turn in your FHA loan application when you have a solid 12 months of on-time payments for all financial obligations. -ForeclosurePast foreclosures are not necessarily a roadblock to a new FHA home loan, but it depends on the circumstances. -Collections, Judgements, and Federal DebtIn general, FHA loan rules require the lender to determine that judgments are resolved or paid off prior to or at closing.
Adjustable Rate Mortgages (ARM)s are loans whose interest rate can vary during the loan’s term. These loans usually have a fixed interest rate for an initial period of time and then can adjust based on current market conditions. The initial rate on an ARM is lower than on a fixed rate mortgage which allows you to afford and hence purchase a more expensive home. Adjustable rate mortgages are usually amortized over a period of 30 years with the initial rate being fixed for anywhere from 1 month to 10 years. All ARM loans have a “margin” plus an “index.” Margins on loans range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value. The index is the financial instrument that the ARM loan is tied to such as: 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI). When the time comes for the ARM to adjust, the margin will be added to the index and typically rounded to the nearest 1/8 of one percent to arrive at the new interest rate. That rate will then be fixed for the next adjustment period. This adjustment can occur every year, but there are factors limiting how much the rates can adjust. These factors are called “caps”. Suppose you had a “3/1 ARM” with an initial cap of 2%, a lifetime cap of 6%, and initial interest rate of 6.25%. The highest rate you could have in the fourth year would be 8.25%, and the highest rate you could have during the life of the loan would be 12.25%. Some ARM loans have a conversion feature that would allow you to convert the loan from an adjustable rate to a fixed rate. There is a minimal charge to convert; however, the conversion rate is usually slightly higher than the market rate that the lender could provide you at that time by refinancing.
Hybrid ARM mortgages, also called fixed-period ARMs, combine features of both fixed-rate and adjustable-rate mortgages. A hybrid loan starts out with an interest rate that is fixed for a period of years (usually 3, 5, 7, or 10). Then, the loan converts to an ARM for a set number of years. An example would be a 30-year hybrid with a fixed rate for seven years and an adjustable rate for 23 years. The beauty of a fixed-period ARM is that the initial interest rate for the fixed period of the loan is lower than the rate would be on a mortgage that’s fixed for 30 years, sometimes significantly. Hence you can enjoy a lower rate while having a period of stability for your payments. A typical one-year ARM on the other hand, goes to a new rate every year, starting 12 months after the loan is taken out. So while the starting rate on ARMs is considerably lower than on a standard mortgage, they carry the risk of future hikes. Homeowners can get a hybrid and hope to refinance as the initial term expires. These types of loans are best for people who do not intend to live long in their homes. By getting a lower rate and lower monthly payments than with a 30- or 15-year loan, they can break even more quickly on refinancing costs, such as title insurance and the appraisal fee. Since the monthly payment will be lower, borrowers can make extra payments and pay off the loan early, saving thousands during the years they have the loan.