There’s a first time for everything, and buying a home is no exception. But buying your first home isn’t what it used to be, with wage increases failing to keep pace with the housing market. It’s even worse in hot markets like Bend, Eugene, and Portland, Oregon.
According to a recent study, median home prices adjusted for inflation have increased 121% nationwide since 1960. Meanwhile, average household income has increased a comparatively insignificant 29%.
In July 2019, Bend home prices hit a median of $470,000. Eugene is significantly less expensive: according to RMLS statistics, the median for July 2019 sales was $334,200. That’s still a good bit higher than the nationwide median of $280,800.
To add further insult to injury, buyers in both markets face exceptionally low inventory, especially on homes which fall below that median. Like most buyers, you’re probably looking for a relatively inexpensive move-in ready home in a desirable neighborhood, but there just aren’t many of those left. You’ll most likely have to compromise in terms of location, condition, size, finishes or all of the above.
The good news–for now at least–is that mortgage rates are low. In fact, they hit a 3-year low on September 1, 2019, dropping to a national average of 3.5% for a conventional, fixed-rate 30 year mortgage.
By October 15, that average had climbed to 3.78%. And first-time home buyers in Oregon face rates that are a bit higher than that, at 3.94%. Still, with the Federal Reserve continuing to aggressively cut interest rates, rates are likely to remain favorable to borrowers for the time being.
The question for you, of course, is whether you’ll be able to take advantage of them or not. Whether you’re thinking of buying your first home in Oregon or elsewhere, it’s important to have a clear sense of what the process will be like, what your options are, and whether the numbers line up or not.
Read on, and we’ll walk you through the ins and outs of buying your first home in Bend and Eugene, Oregon, giving you a sense of all the different factors that might lead you in one direction or the other.
To Rent or to Buy: That is the Question for Would-be First Time Home Buyers
Whatever market you’re looking in, unless you have access to free housing, the first question is almost always whether it makes more financial sense to rent or to buy. Buying your first home is nerve-wracking, but in many cases it’s an investment that can pay off quicker than you might expect.
Still, make that leap before you’re really ready, and it’s quite possible you could end up in a financial pickle. We’re not going to beat around the bush: buying a home is an investment, and like every other investment, there’s some amount of risk involved.
With renting, there are fewer unknowns: you know that you’re going to be out x number of dollars per month, with no possibility of recouping anything but your security deposit. As a home buyer, the question is how much you will be able to recoup of your money down, closing costs and interest payments if you need to exit stage left.
All of that depends on a number of different factors. So it’s important to consider those factors individually, weighing them against your life situation.
Let’s look briefly at the rental markets in Bend and Eugene before we get into the nitty-gritty of buying your first Oregon home. According to rentcafe.com, the average apartment in Bend is renting for $1,262. In Eugene, that figure is $1,366.
For a detached two bedroom home in Bend’s city limits, expect to pay at least $1,500 a month and probably closer to $2,000. In Eugene, expect to pay between $1,200 and $1,800 a month.
As we’ve noted, both Bend and Eugene have a low inventory of homes for sale, but their rental markets are even tighter. That’s especially true if you’re looking for a pet-friendly rental, an increasing rarity in an already bleak landscape for renters.
If you can beat the hordes of other applicants and land a nice pad, you might end up feeling like you’ve won the lottery and be tempted to stay there longer-term. But even if you’re happy with where you’re living and how much you’re paying, it’s worth crunching the numbers on purchasing a home. Read onward.
How Much to Put Down When You’re Laying Down Dough for Your First Home
Talk to any lender or real estate agent, and you’ll learn pretty quickly that 20% down is the magic number. There’s a good reason for that: lenders require costly private mortgage insurance, a.k.a. PMI, on conventional loans if your down payment is any lower. There’s a couple of exceptions, which we’ll go into later.
Dollars and cents-wise, PMI ends up costing you an extra 0.5% to 1% of the total value of your loan per year, depending on your credit score. You can cancel it, though, once you reach 20% equity. Needless to say, that will happen faster if you put down closer to 20%.
Apart from conventional mortgages, the Federal Housing Administration offers its own loan packages which can be especially attractive if your credit score is low. FHA rates are actually lower than for conventional loans: as of publication, consumerfinance.gov reported a median interest rate of 3.75% for Oregon home buyers.
There’s a catch, though: FHA loans entail an additional up-front mortgage insurance premium of 1.75% of the total loan amount. That’s followed by an annual MI payment of 0.45% to 1.05% of the balance of the loan. Unlike conventional loans, assuming you’re at less than 10% down, MI payments remain the same throughout the life of the loan. In other words, if your credit is high enough to qualify, conventional financing is the way to go in the long run.
Running the Numbers for First-Time Home Buyers in Bend and Eugene, Oregon
Let’s run a few different numbers to see what life will be like with different down payments on a hypothetical $300,000 home in Eugene. We’ll assume a property tax bill of $3,000 per year or $250 per month and a homeowners insurance premium of $80 per month or $1,000 per year. 5% down, or $15,000, is just above the 3% minimum required on a conventional loan and 3.5% minimum required on an FHA loan, so let’s start there.
Assuming a high annual MI premium of 1%, your monthly payment on a 30 year conventional loan at 4% would be $1,916. After about 8 years, you could cancel your mortgage insurance and pay $1,671 per month. Opt instead for an FHA loan at 3.75%, and your monthly payment would be $1,888 over the lifetime of the loan. But you’d also need to put down an additional $4,998 up front.
Now let’s look at the numbers at 20% or $60,000 down. On a 30-year fixed conventional mortgage at 4%, you’ll end up paying $1,476 per month. In other words, the difference between $15,000 down and $60,000 down is about $450 per month for the first 8-ish years and $200 per month thereafter.
If you’re buying your first home and just getting established financially, $60,000 is a lot of cash to lay down. On top of that, you can expect to pay at least $7,000 for closing costs. The reward is that you’ll have a mortgage payment that’s about on par with what you expect to pay for rent in Eugene. But what happens if you need to move to a different home?
Let’s say that over the course of 5 years, your $300,000 home appreciates at a 4% annual rate, significantly lower than what both Eugene and Bend’s markets have seen for the past few years. You’re able to sell it for $365,000.
The amount of money you’ve invested at that point includes your $60,000 down payment, $7,000 in closing costs, $89,000 in mortgage and tax payments, and $18,250 in realtor fees, for a total of $174,250. At this point in your mortgage, you still owe $216,500, meaning that the amount you receive from your sale is $143,500.
In other words, you aren’t yet breaking even in terms of your monetary investment, netting -$25,750. Let’s say, though, that you were renting a home at $1,400 a month, with 4% added to that total each year. You’d be out about $57,500, which means you’re making about $32,000 on the sale of your home relative to the amount you’d bleed out in rent.
At 5% down, your margins certainly get thinner. In the case of a conventional loan, you’ll have invested your $15,000 down payment, $7,000 closing costs, $115,000 in mortgage and taxes and $18,250 in realtor fees, for a total of $155,250.
Since you’ll still owe $257,000 on your mortgage, you’ll receive $108,000, for a net of -$47,000. But the amount you lose is still $10,500 less than you’d have spent on rent during that same period. For comparison’s sake, an FHA loan at 3.75% interest would lead to a net of -$49,500.
Since detached homes rent for more in Bend than they do in Eugene, the calculus will be similar if you’re comparing, say, a $350,000 home purchase to a $1,600 per month rental. Obviously though, you’ll need to throw more money down on a $350k purchase than you would at $300k.
Naturally, you’ll want to get a sense of the numbers specific to the down payment, loan amount, and loan payment you’re planning to make. The best thing to do is just talk to a lender, but if you’re just mulling over your options and want some rough numbers, there are plenty of online mortgage calculators.
Keep in mind that your run-of-the-mill mortgage calculator won’t take into account PMI, property taxes, or home insurance. To avoid sticker shock later on, make sure to use a mortgage calculator that adds those numbers to your expected monthly payment.
Luckily, our partners at Director’s Mortgage have a mortgage calculator that does just that. Give it a spin, but recognize that property taxes can vary wildly on similarly-priced homes, especially in Eugene.
Unconventional Loan Packages and Options for Down Payment Assistance in Oregon
The above are just a couple of the most typical examples of loan packages you might receive when you’re buying your first home in Bend or Eugene, Oregon. There are a few other options, including zero-down loans, piggyback loans, and VA loans for veterans and active service members.
If you qualify for a VA loan, then awesome–the process of buying your first home could be much simpler than it might be otherwise. VA loans can be obtained with poor credit and as little as zero money down, but without the costly mortgage insurance that other programs require.
VA loans do, however, feature an up-front fee between 1.25% and 3.3% of the total loan amount. The percentage depends on the length of your service, what branch you’re in, and other factors. Especially if you’re toward the upper end of the scale, be sure to do the math on whether other options balance out better.
If you lack the spare cash for a down payment but don’t qualify for a VA loan, there may be other options. Oregon Community Credit Union and Key Bank, to name two lenders, offer so-called zero percent down programs for qualified borrowers.
Lenders actually accomplish this through some form of down payment assistance, and you can expect significantly higher interest rates and origination fees. Before considering these programs as a viable option, it’s important to make sure that you, and the property that you intend to purchase, meet the requirements..
If you can make enough of a down payment to qualify for conventional financing but are wary of the extra bill for Private Mortgage Insurance, piggyback loans are worth your consideration. Basically, piggyback loans involve taking out a second mortgage on top of your first as an alternative to putting more money down.
A common example would be 10% down with 80% on the first mortgage and 10% on the second. Rates are higher on second mortgages, so you’ll want to make sure that the difference doesn’t end up costing you more than PMI would.
Last–but not least–down payment assistance is definitely worth investigating. The National Homebuyer’s Fund offers down payment assistance of up to 5% in the form of either a gift or a zero-interest loan that’s forgiven after three years. Your lender can help you find out if you qualify.
Down payment assistance programs particular to Oregon are somewhat limited. However, you can find a list of community organizations who offer some form of down payment assistance on the Oregon Housing and Community Services website.
As something of an aside, we’ve recently partnered with Eugene developer Dylan Lamar of Cultivate Place to investigate and promote alternative options for affordable housing in Eugene. We’re particularly excited about a pilot program that he just launched which will provide three families with an opportunity to build their own self-contained 2 bed 1.5 bath units together on a lot within walking distance of downtown Springfield.
The project will require a significant time commitment and a willingness to learn a number of building skills from the licensed contractor who will be on board as a construction consultant. The rewards are simple, and we think quite compelling: affordable housing with cutting-edge design in a great location. Participation will require a buy-in of just $12,000 in earnest money. After construction, mortgage, insurance and taxes could total as little as $700 per month for each family.
There’s far more to the project than we can mention here, but you can visit the Backyard Barnraising home page for an introductory video and a link to all the juicy details. We, along with Dylan hope that this project will help serve as a template for further affordable housing solutions in Eugene.
Know What You’re Getting Into When You Buy Your First Home
Let’s say you can put 20% down, have a pretty decent credit score, and can still leave money in savings for a rainy-day fund. In that case, we’ll go so far as to say that purchasing a home is a no-brainer compared to the costs of renting. But even with lower credit and less money down, if you plan to stay put in your home for at least a few years, you’re still likely to come out ahead.
Do keep in mind that the stakes are higher if you end up unable to pay your mortgage. Your lender will offer a certain grace period, but go beyond that and you can expect a significant ding to your credit score.
In strong sellers’ markets like Bend and Eugene, if you’re unable to make your payments, you can expect to put your home on the market and expect to sell it well before there’s any risk of foreclosure. The nightmare scenario, however, is that you need to sell your home but can’t make enough money on the sale to pay off the balance of your loan.
That was the reality for many folks after the 2008 crash, and Kip helped hundreds of homeowners in Bend get out from under their mortgages by negotiating a short sale with their lenders. The risk is obviously higher with a low down payment, particularly if the market experiences a downturn.
We strongly believe that Eugene and Bend’s markets are better insulated from a recession than most due to their exceptionally low inventory. Still, it’s good to keep in mind that home ownership comes with unique risks and unique responsibilities. The decision is something that you and your family need to feel out for yourselves.
To qualify for a loan in the first place, good credit and stable employment are the main prerequisites. Technically, you can get a loan based on income from a job that you plan to quit, but we don’t recommend it unless you’re reasonably certain you can get re-hired. For conventional loans, lenders typically require a debt-to-income ratio or DTI of 43%. That ratio includes not only your mortgage payments but also your insurance premiums, automobile lease, student loan payments, and any other recurring debt payments.
The ceiling is lower for FHA loans, at 50%. It’s up to you, though, to determine your own financial comfort zone. It’s important too–like, really important–to make sure that once you’ve applied for a loan, you don’t take on any new debt. Even if you stay well beneath the standard DTI ceiling, you’ll trigger a process that can easily throw your home purchase off the rails.
The Reality of the Market for First-Time Home Buyers in Bend and Eugene, Oregon
In both Eugene and Bend, inexpensive properties in good neighborhoods that are basically move-in-ready are hot commodities. Bidding wars can easily trigger, and these homes frequently are snapped up by all-cash buyers who can make an offer significantly above list price.
One thing your agent needs to do for you is make sure that your offer is as attractive as it possibly can be, particularly if you’re planning to finance. It takes time to secure a loan, putting you at a disadvantage compared to all-cash buyers who can typically close much faster.
We work with lenders, however, who do all of their underwriting in-house and can secure some of the fastest turnarounds in the business. That’s a significant advantage, and even if you can find lower rates online, working with local lenders gives you a much better assurance of a smooth transaction and often, a lot less of the fine print and hidden that can end up costing you.
First-time home buyers in Eugene and Bend can avoid some of the competition, and end up saving significant dough, by aiming for “diamonds in the rough.” A number of homes at the lower end of both markets have dated finishes and require a certain amount of cosmetic fixes.
Your agent, however, can connect you with professionals who can spruce things up to your specifications. You may hate the ugly, 70s-vintage carpets in the home that you’re looking at, but chances are decent that the original hardwood is still there underneath. It’s important to have an eye for the potential hiding underneath the surface and to keep in mind the dollars and cents of doing minor renovations versus buying a turnkey property at higher than list price.
Lastly, especially on older homes but even on newer ones, issues can turn up on inspection reports. Your agent needs to know how to properly leverage these issues in terms of asking the seller to perform repairs, issue a price reduction, or offer a closing credit. The later is nice in that it reduces the amount of money you have to pay up-front at closing and gives you some extra financial breathing-room.
LOHR Real Estate’s principal broker, Kip Lohr, worked for over a decade as a contractor, and his building experience has tended to pay significant dividends in this arena. It’s much easier to negotiate repairs when you yourself have a clear sense of exactly what’s going on with a home and exactly what steps are necessary to mediate a problem.
Unfortunately, many agents do not have this knowledge. As a result, some fail to apply as much pressure as they ought to on the sellers and their agent or even recommend repairs that end up being ineffective.
All of that is part of the reason that buying your first home, whether in Oregon or elsewhere, can end up being so scary. If your rental has problems, then it’s ultimately your landlord’s responsibility. But what takes getting used to as a first-time home buyer is that ultimately, it comes down to you.
Having an agent who you can trust and who can connect you to other trustworthy professionals can and should take a lot of the edge off of that sense of responsibility. That, first and foremost, is what we’re here for. That starts with providing the kind of in-depth information that you find here, but we’re more than happy to go even deeper into your particular situation. Contact our Bend office or our Eugene office and we’ll get you started on the right track.