Aric DiPiero

The long-predicted wave of buyers back into the marketplace has finally begun in Southwest Florida, but not because home prices have magically rebounded. The reason for the excitement and flurry of activity is that banks have finally capitulated. In their haste to unload their ever-increasing inventory of foreclosure properties, large lenders have put hundreds of new or nearly-new houses on the local market at as little as 30-40% of the price they commanded when first built only a few years ago. Just this Friday a customer of mine closed on an 1800-square-foot 3/2/2 in a great neighborhood for the contract price of $95,500. The next day I was tagging along with a Realtor who was showing a two-year-old, 1400-square-foot 3/2/2 home in excellent condition with a list price of $89,600. In 2005, that same model sold for $250,000. At today’s prices, my clients are securing complete monthly housing payments (including taxes, insurance, and everything) of as little as $750 - $850, and with out-of-pocket costs of no more than a small earnest money deposit (refundable at closing), and the cost of a home inspection.

There is a link on my web site (www.hometeammtg.com) to a detailed list of 30 homes in Lehigh Acres which are listed for less than $125,000. There are additional filters in place as well: all of the homes shown were built after 2000 and all are move-in ready. I compile the list weekly, and lately it has been more like 40 or 50 homes long. By the time I update it every week, there are usually 10 or more homes on the list under contract (showing as “Pending” status).

In conclusion, this is a wake-up call to all of you teachers, single mothers, and professionals making $30,000 to $40,000 a year who have been waiting for houses to become affordable. If you are renting a house (or apartment!) now for $800 a month, it is very possible you could be using that same money to pay a mortgage. The tax benefits alone make this worth considering. However, the window of opportunity is not guaranteed to stay open forever; interest rates remain low, but lending guidelines tighten by the week. 100% financing is still available today, but it may not be for long. Do your due diligence, but don’t put it off another year.

Just as the best moment to sell at the top of the bubble was, in hindsight, probably August 2005, we may look back in a few years and declare that the ideal buying time was March 2008.

While no market analysis can be perfect, this comparison of renting vs. buying should offer a rough idea of the costs, pros, and cons of each. It is specific to here (Lehigh Acres, Florida) and now (January 2008).

To rent or to buy? Regardless of your particular time or place, there are several constants that apply to this decision. In the beginning years of a mortgage, it’s generally going to cost more on a monthly basis to own than to rent. Maybe not much more—and if one factors in tax deductions the difference may vanish entirely—but in terms of writing out a check on the first of the month, the number you fill in is generally going to be smaller if you are making it out to a landlord rather than to a bank. It is also easier to qualify for a lease than a mortgage. Whatever your credit or employment history, someone should be willing to rent to you. It’s easier to move around as a renter; if you aren’t sure where you want to live or have not yet found a stable career, that flexibility can be appealing. On the other hand, owning a home is undeniably a large part of the American dream; renting is something you do for a while, but anyone interested in raising a family imagines doing so in a home they own. Of course, some housing markets are different from others. I think most people would agree in hindsight that 2005 was not a very good year to buy a home in Lehigh Acres. But what about 2008? The following analysis is based on market data provided by local property managers and REALTORS®, and assumes that prospective homebuyers qualify for 100% financing using the USDA Guaranteed mortgage program (see: It's January 2008 and yes, there is still 100% financing available in Lehigh Acres, Florida).

Initial Cost

Surprisingly, it can still cost less out of pocket to buy a home than to rent one. Let’s consider a typical 1500 square foot 3 bedroom, 2 bathroom home built in the last five years in Lehigh Acres. Right now that home can be rented for about $800 a month. The same house can be bought for as little as $115,000 either out of foreclosure or from a motivated seller (see: 30 homes for sale in Lehigh Acres under $130,000 that are NOT short sales). Here are the typical up-front expenses required for each transaction:

Rental $800 First month's rent $800 Last month's rent $1000 Security deposit $50 Application fee Total: $2650

Purchase $500 Earnest money deposit $325 Full appraisal $300 Home inspection (recommended) Total: $1125

(If a pet deposit is required, add an additional $300 to the rental column.)

Monthly housing payment

Rent on the home in the example above is $800 per month. To own it will cost $950-$1050 per month, depending on the hazard insurance premium and most recent tax assessment. Cost for utilities is a wash.

Other factors to consider

Stability:

Locally, it is an unfortunate reality that many landlords are folks who bought property with the intention of flipping it (quickly reselling for a profit), and then were forced to take on tenants instead when housing prices fell sharply. Increasingly, these reluctant landlords are falling behind financially, and many renters are finding themselves in foreclosed upon properties with no warning (article). Renters need to be aware of the possibility that they may not be able to complete their lease in the current market.

The flip side is that as a homeowner you may find it difficult to sell your home right now, as inventory is high and marketing times are prolonged. If you don’t plan to stay in a home for several years, you may want to continue renting rather than lock yourself into one property until the market recovers.

Eventual increase in equity:

I want to clarify this point: I’m not talking about rapid increase in equity over a few months, such was the case during the real estate bubble a few years ago. Buying a home is not a get-rich-quick scheme or means to consolidate your debt. However, Southwest Florida is an attractive area which sees a constant influx of population from all age groups. Nationally, housing values normally increase at a rate far outpacing inflation; this is especially so in desirable warm-weather areas such as ours. At the same time, paying on your mortgage every month will slowly reduce the principle owed. Over a prolonged period, these dual forces (normal real estate appreciation and reduction in principle owed) will create equity in your home. Renters enjoy no such accumulation of wealth simply by making their housing payment.

Tax benefits

Under federal law, the interest paid on a mortgage loan is tax deductible. This is also true of property tax, second mortgages or equity lines up to $100,000, and mortgage insurance (though mortgage insurance is not required on the USDA Guaranteed program). While every individual should consult a tax advisor to determine their own savings, here is an example:

On a $120,000 mortgage at a fixed interest rate of 6.0%, you will pay $7760 in mortgage interest in the first year of the loan. Let's say your property tax bill is $1800. Your total income tax deduction for owning your home is then $9560. If you are in the 25% tax bracket, that could result in a savings of $2390, or about $200 a month. Tax scenarios will vary, but for some people the allowed deductions for homeownership could completely offset the monthly payment difference between owning and renting.

Social benefits

This is harder to pin down, and a lot of the available analysis is subjective or overly simplified. In short, most people making claims about the benefits of homeownership are trying to sell homes. However, this article cites some interesting studies that may confirm what most of us generally suspect: that owning a home is more satisfying than renting.

But have we seen the bottom?

Earlier in this article I mentioned that, in hindsight, 2005 was a poor time to buy a home in Lehigh Acres. What assurance is there that 2008 is not going to be similar? Well, home prices have already fallen by 50% in many cases—sending some home prices back to 2001 levels. We are seeing a growing number of foreclosure homes available on the market, and these are being aggressively priced by banks which are willing to take huge losses to get them off the books. New home construction has all but halted, leaving us with an available inventory of 3 to 4 months’ worth of finished vacant housing in Lee County as of the end of the third quarter of 2007 (article). This is higher than normal, but not inexhaustible. Existing home pricing is still all over the map since many hopeful sellers have not yet accepted the new market realities. But, if you start at the low end of the spectrum and shop for deals, there are some amazing ones out there. If you can get an affordable fixed payment, are not in a hurry to resell, and would otherwise be paying rent anyway… it looks like nothing but upside to me.

(Lehigh Acres isn’t the only area where true 100% financing is still offered, of course. It is, however, the area where I focus my personal services, and therefore makes a useful keyword to include in the title of this article…)

Yes, 100% financing is still alive and well in many areas, under the correct circumstances. Mainly those are:

• You must be buying your primary residence
• You must be able to document your income and afford the housing payment
• You must have reasonable credit

Beyond that, there will be additional requirements depending on the program used. VA loans, for example, require the borrower to be an eligible military veteran or surviving spouse. One regional bank I work with has a portfolio 97/3 product with specific credit requirements and household income caps. And finally, (drum roll please) there is an amazing little loan program administered by the USDA’s Rural Development division called Guaranteed Rural Housing.

Well, not so little perhaps; for fiscal year 2008 the federal government has approved $5 Billion in funding for these mortgages.

This is a true 100% program, allowing all closing costs and prepaid items (such as hazard insurance premiums) to be financed, even above the sales price. That’s right—it’s possible to bring no money out of pocket whatsoever, and the sales contract does not need to be written any particular way for this. Additionally, there is no requirement for reserves. Almost every other mortgage program will require a borrower to have (and prove they have) at least a couple months’ worth of housing payments available in the bank. This one does not. Finally, and this is my favorite part, there is no requirement for monthly mortgage insurance premiums. Most of the time, any loan for over 80% of a home’s value will require the borrower to pay Private Mortgage Insurance (PMI) to protect the lender in the case of default. FHA loans require a version of this called Mortgage Insurance Premium (MIP) regardless of loan-to-value. The USDA Guaranteed loan has no such requirement, making its fixed monthly payment the lowest in the industry.

So, what are the “additional requirements” involved with USDA Guaranteed Rural Housing (GRH)? First, the property being purchased must be in an eligible area. This loan was originally intended to help farmers buy their homes, and ‘rural’ is right there in the name. What this means in practice is that the loan is not available in areas of high population density, and this is determined by the most recent US Census, which took place in 2000 (the next one will be in 2010). At that time, locally, most of the area east of I-75 fit the criteria. Pretty much all of Lehigh Acres and Naples currently qualify for this program, as well as surrounding areas such as Alva and Immokalee. Fort Myers and Cape Coral are ineligible.

Next, there are household income caps for applicants. These are based on the number of people in the household (which can include children, elderly parents, or really anyone who actually lives with you), and there are modifiers (for instance, child care costs paid to a non-family member can be a deduction). This mortgage program is intended for moderate-income individuals, and the caps vary by county. In Lee County, the maximum adjusted income limit for a single person is $48,000. For a family of three, $61,700. If there are five people living in your household, the limit is $74,050. This has the additional effect of limiting the home price one can qualify for on this program. A few years ago, when there weren’t many homes on the market under $200,000, it would have been difficult or impossible to qualify using this mortgage. Today there are dozens of homes available at any given time in the low $100’s. Total monthly payments on these homes, including property tax and hazard insurance escrows, can be as low as $800-$1000.

Also, the borrower cannot own any other property at the time of closing.

A few words on “reasonable credit”: For the purposes of the USDA GRH program, a 620 middle credit score is golden. As long as you have that, the documentation requirements are fairly modest; you don’t have to prove previous rental history, or explain past credit delinquencies. It is also easier to obtain exceptions for higher debt-to-income ratios, if needed. If we check your credit and your scores are slightly below this level, say in the 580-619 range, we can usually recommend steps to quickly bring your scores up to 620. For instance, opening up additional revolving credit lines if you have fewer than three, or paying down an existing balance on a credit card. Finally, if you have no credit scores, you can still qualify for this program using alternative documentation.

While that’s certainly not everything I could write about this fantastic program, the rest is details. If you’re read this far and think this program could work for you, please contact me. There is no charge to review your credit report with you or run it through analysis tools to help you bring up your credit scores. Feel free to ask me any questions about this program or the local housing market. You may be surprised how much house you can afford in 2008.

Visit hometeammtg.com for a link to "30 homes for sale in Lehigh Acres under $130,000". All of these homes were built after 2000, and NONE are short sales. Aso check out the "Total Payment Estimator".