Homeowners who endured years of declining home values will discover that the game has changed in their favor.
With low mortgage rates and home prices gaining momentum, an increasing number of buyers are expected to shop for homes this spring. The good news for sellers: The inventory of homes for sale is shrinking, so they have less competition and more control of the situation.
Loan mods: As more distressed homeowners regain equity in coming months, many with high-interest loans will be able to refinance and perhaps cash out some equity. If you fell behind on your mortgage payments, you might get a second chance to modify your loan.
Homebuyers are losing bargaining power as the market shifts in favor of sellers. But home prices remain attractive for the most part, and low mortgage rates should stay on their side for a little longer.
1. Fewer options, higher prices and bidding wars
If you plan to buy a home this spring, expect competition.
Demand from homebuyers is growing faster than the supply of homes for sale, according to data from the National Association of Realtors.
"It's creating a little bit of a shortage and a mismatch between supply and demand," says Jed Smith, managing director of quantitative research for the National Association of Realtors.
Buyers are encountering bidding wars in many parts of the country, Smith says. Competing offers pose a challenge for first-time homebuyers.
Competition: "Multiple offers seem to be the norm these days," says Patty Da Silva, owner of Green Realty Properties in Davie, Fla. She says she recently represented a seller who received more than 15 offers in one weekend for a house in Cooper City, Fla.
"Home listed Wednesday evening; first showing on Saturday at 1 p.m.; several offers came in on Saturday and several Sunday; the home was under contract by Monday morning," she says.
As of February, there were 1.94 million homes for sale nationwide. That represented a supply of 4.7 months at that month's sales pace. A balanced market requires about six months' of supply.
During the same period last year, there was a supply of 6.4 months.
"Back in 2010 we had 9.4 months' of supply," Smith says.
2. Loan modifications made easy — for some
Homeowners who are behind on their mortgages may get a hassle-free opportunity to reduce their monthly payments.
The Federal Housing Finance Agency will require mortgage servicers to offer a streamlined modification program to borrowers with loans owned or guaranteed by Fannie Mae and Freddie Mac, starting in July. The offers will be sent to homeowners who are at least 90 days behind on their loans but no more than two years behind. To qualify, borrowers must owe at least 80 percent of the home's value.
The modification reduces the loan's interest rate and extends the loan term to 40 years.
Minimal paperwork: Borrowers won't be required to submit any financial documentation to the lender to get approval. The loan modification becomes permanent after three payments are made during the three-month trial period.
"Streamlined modification provides borrowers who face difficulty satisfying the documentation standards of traditional workout programs with a path to stay in their homes with reduced paperwork requirements," says Meg Burns, senior associate director for housing and regulatory policy for the FHFA. "This option should be especially helpful to those who are self-employed, part of multigenerational households, or simply overwhelmed with the document-collection burden."
3. Federal Housing Administration loans lose appeal again
Borrowers seeking low-payment mortgages will be charged for mortgage insurance for the life of their loans if they don't get their Federal Housing Administration mortgages by June 2.
The FHA currently requires borrowers to pay for mortgage insurance on FHA loans until the balance reaches 78 percent of the original value of the home.
Pay forever: Once the change goes into effect, all new FHA loans with less than a 10 percent down payment will carry mortgage insurance until the loan is refinanced or paid off. Loans with a 10 percent down payment or greater will have to pay for mortgage insurance for at least 11 years.
For borrowers who plan to stay in their homes for less than 10 years, the new rules won't make that much of a difference, says Cameron Findlay, chief economist at Discover Home Loans. That's because normally, it takes borrowers about 10 years to reach the required loan level for the insurance to cancel anyway.
"But for those who are planning (to) keep their houses for an extended period, this is a big deal," Findlay says. "They can always refinance later -- but who knows where rates are going to be 10 years from now?"
4. Equity loans and cash-out refinances are back — sort of
About 1.7 million homeowners regained equity in their homes last year, and an additional 1.8 million are close to it, according to a recent study by CoreLogic. All they need is home values to go up by another 5 percent, CoreLogic says.
As home prices rise, millions of homeowners might consider turning to their homes as a potential source for a loan. Cash-out refinances and home equity loans, which were popular during the housing boom, are slowly returning, along with the temptation to tap into equity.
"I'm starting to see some of that," says Michael Becker, a mortgage banker at WCS Funding in Baltimore. He says he has recently received a couple of inquiries from parents who are thinking of using some of their equity to pay for college expenses. Another client is considering a cash-out refinance to pay off credit card debt.
Home as ATM: Lenders remain somewhat reluctant because these types of loans contributed to the mortgage meltdown as homeowners turned their homes into ATMs. But borrowers who have good credit scores and sufficient equity should be able to find lenders willing to do cash-out refis and home equity loans this spring.
5. Mortgage rates rise at a snail's pace
Mortgage rates are expected to creep up this spring but should remain low.
Up just a little: The Mortgage Bankers Association estimates the 30-year fixed rate will reach 3.9 percent by the end of the first quarter this year. That's not as good as the superlow rates that borrowers got in December 2012, when the 30-year fixed hit a record low of 3.5 percent in Bankrate's weekly survey. But it's still a good deal for most buyers and refinancers, housing experts say.
"Rates are climbing slowly, but even by the end of year, they are not going to be astronomical," Smith says. "They are still a bargain."
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