Homes in the Seattle area are appreciating at the fastest rate in the nation. Over the last 12 months, for example, homes in Seattle have gone up 14.1%, Bellevue 12.1% and here in Sammamish, 12.2%. Even though those rates—what real estate site Zillow calls a “hot market”—are not likely to continue indefinitely, a rate of 5%-6% per year over the next few years is highly likely.
This puts buyers who are hoping to break into the housing markets into a quandary. Should they strive harder to save up the fictitious “normal 20% down payment?” Should they relocate to an area where prices are lower? Should they give up on the dream of home ownership altogether?
The answer to all three questions is a resounding NO. Although prices in the Seattle are among the highest in the nation, income is higher here, as well. Many first-timers are paying a high price to rent here; the problem is getting the cash together for the down payment.
We should first mention the cost of waiting. That $500,000 starter home you may have your eye on now will in all likelihood bring $530,000 a year from today. That’s the effect of a conservative 6% appreciation rate. Even in the doubtful event that interest rates stayed exactly the same as today, a $30,000 increase in price means a monthly payment more than $125 higher. And if interest rates are .25% higher a year from now, the payment will be almost $200 higher.
There is a solution to this problem: first, make your decision to stop waiting and begin the process to become a homeowner now, rather than at some indefinite time in the future.
Next, get your financial documents together and meet with a loan officer to find out what you can buy NOW with your current resources.
You may have some “credit issues.” If your FICO score is 580 or higher and you can document your income, you can get a mortgage—in spite of the many stories in the media that try to convince you that it is “insanely difficult” to qualify for a home loan. A lower credit score doesn’t necessarily disqualify you from getting a mortgage; it just means you may have to pay a slightly higher rate.
The toughest hurdle for most first time buyers is the cash needed for down payment and closing costs. Despite what you may have heard, you can buy a home for 5% down, not 20%. Sure, you’ll pay mortgage insurance (depending on your credit score, a $600,000 purchase with 5% down will have a mortgage insurance payment of around $420, but the lender will let you drop it after the property has appreciated enough. At the rate we’re going in Washington, that could happen in just over two years.
You should also keep in mind that in high-cost areas like Seattle, rents are very high (as though you didn’t already know!). Because you’ll be able to deduct the mortgage interest and property tax you pay on your tax return, you may discover that owning a home costs the same—and sometimes even less—than renting the same kind of property. And, unlike rent, your monthly mortgage payment won’t go up as the market increases.
Most people view the home buying process with great fear. The truth is that getting into the housing market is easier than you might believe. With the threat of appreciation on Seattle homes, financing your first home may become more difficult in 2017 and onward, but the opportunity is certainly available now.