Cities are popular today, with a growing number of people targeting condominiums and single-family homes located in dense, urban areas. These buyers want to live within walking distance of restaurants, public transportation and stores.
But the urban lifestyle, while offering plenty of benefits, comes with financial challenges, too. Homebuyers will have to spend more to live in the center of a major city, and that means taking out a larger mortgage. They might also struggle to find homes to buy, as demand is outpacing supply in many big cities.
"The reasons people like urban areas is walkability, being able to walk to work, restaurants and bars," said Nat Kunes, vice president of product at Goleta, California-based AppFolio, a software-as-a-service company that offers tools such as tenant screening and online rent collection. "But there are challenges. One of the biggest is demand. If everyone wants to live there, that drives up the cost of real estate. It makes it more expensive."
Are you ready to make the move to an urban area? If you're buying, you'll need to be prepared for the extra financial burden of financing your new home.
Moving to urban
The Urban Land Institute earlier this year released a report, The New Geography of Urban Neighborhoods, showing that the population in urban areas today is growing at nearly the same rate as it is in suburban communities.
Erin Talkington, a principal and director of consulting at Washington, D.C.-based real estate consultant RCLCO Real Estate Advisors, which worked with the Urban Land Institute on the report, said this is a change. The populations in suburban areas had long been growing faster than those in urban communities, she said.
But Talkington said the results of the study weren't a surprise.
"The conversation lately across the nation has been about the growth of urban areas," she said. "It's not surprising, then, to see the population growth in cities."
According to the report, the growth rate for urban areas was 1 percent from 2000 to 2015, compared to 13 percent for the suburbs. But between 2010 and 2015 alone, the growth rate of urban neighborhoods hit 3.4 percent, while it stood at 3.7 percent in suburbs, according to the report. That's a far smaller growth gap.
The Urban Land Institute says that more than 29 million people live in urban neighborhoods today. That represents 17 percent of the total U.S. population living in just 1 percent of the land area in the largest Metropolitan Statistical Areas of the United States.
Be prepared to spend more
Living in an urban area does come with benefits. But the challenge when buying a home is price. Homes in bigger cities tend to be more expensive, and that requires borrowers to take out large mortgage loans.
The National Association of Realtors in August reported that the median sales price of existing homes in the 178 metropolitan statistical areas it studies hit an all-time high of $269,000 in the second quarter of this year. This means that half of all homes sold in these areas sold for more than this figure and half for less. That figure is up 5.3 percent from the median of $255,400 in the same quarter last year.
Buying a home here, then, requires more mortgage dollars. Buyers might even have to take on jumbo loans, mortgages that surpass the Federal Housing Finance Agency's maximum conforming loan limits.
For 2018, this limit is $453,100 for one-unit homes in most parts of the country, meaning that buyers who have to borrow more than this figure will have to take out jumbo loans. These loans, called "jumbo" because they are so big, typically come with higher mortgage rates and require bigger down payments.
There are some metropolitan areas -- such as San Francisco and Los Angeles -- in which the conforming loan limit is higher. In these "high-cost areas," the conforming loan limit can be as high as $679,650. Any loan amount higher than that figure in these areas would be considered a jumbo loan.
Eric Daker, a mortgage loan originator with Planet Home Lending in Rancho Cucamonga, California, said that jumbo mortgages are becoming more common today as home prices rise in urban areas. That's good news, he said, because as these products become more common, it's easier for borrowers to qualify for them.
This doesn't mean that mortgage lenders aren't careful when lending out such large sums of money. Daker said that borrowers will need from six to 24 months of monthly mortgage payments saved up before they can qualify for a jumbo mortgage. He also said that borrowers typically need a down payment of at least 10 percent of a home's purchase price to qualify for these bigger loans.
This means that buying in an urban area with higher prices might require that you spend more time saving up your dollars, for both a reserve fund and a down payment.
"The larger the loan, the larger the down payment you need," Daker said.
Daker said, too, that lenders often require higher FICO credit scores from people applying for jumbo loans. He said that jumbo loans require a minimum FICO score of 661, with most lenders not approving borrowers unless their scores are 680 or higher.
With urban areas in demand, buyers also face another challenge: If they don't act quickly, they could lose out on their dream condo or single-family home.
That's because while they're debating the merits of an urban home, another buyer might make an offer and snatch up the property.
"Homes are harder to find in urban areas," Kunes said. "If you want that home, you better move. If you don't, the guy who shows up five minutes after you will take it."
If you want to buy in a city, then, be sure to get pre-approved for a mortgage loan. Sellers will consider you a more attractive buyer if you’ve already lined up mortgage financing. That could make the difference between you getting that urban home of your dreams and losing it to another buyer.