As interest rates continue to rise, the housing market is certainly cooling off compared to last year. While these high interest rates are turning off many buyers, it’s actually an ideal time to purchase real estate. There’s more inventory available now than there has been at any point in the last decade, prices are dropping, and buyers now have the upper hand when it comes to negotiating any contract terms. However, if you don’t have ample cash on hand you may still be concerned about the affordability of purchasing a home. While the novice buyer is intimidated by the current market, you can actually take advantage of this incredible buyer’s market with a variety of creative purchasing strategies.
Every lender is shouting from the mountains right now about buydowns. The ability to buy down your interest rate is nothing new, you could always pay extra money upfront to buy down your interest rate. However, now that sellers are getting desperate, it’s more and more common to negotiate for the seller to incur the expense of lowering the interest rate. This seller expense comes in the form of a monetary concession to the buyer. You can use this concession to purchase a standard rate buydown for the life of the loan or what lenders call a 2-1 buydown. A 2-1 buydown allows the borrower to reduce the interest rate by two whole points for the first year of the loan and one point for the second year of the loan. In year three, the interest rate returns to the original rate. You can even couple this strategy with a standard buydown. For example, if your quoted interest rate is 7%, you could buy it down to 6.5% and then do a 2-1 buydown. In this scenario your interest rate would be 4.5% for the first year, 5.5% for the second year and 6.5% for the third year and each subsequent year. Lenders are even offering 3-2-1 buydowns now that allow you to lower the interest rate for the first three years of the loan. Depending on how long you want to live in the home, and how you foresee interest rates trending in the future you can choose the best option for you. It is worth noting that these 2-1 and 3-2-1 buydowns can only be used on primary and second home loans. Investment purchases are ineligible.
If a seller owns their property outright, they can offer seller financing to prospective buyers. The seller dictates their qualifications for the buyer. They may require a certain credit score or want to see your bank statements, but ultimately the seller determines if they want to loan to you or not. In this scenario, everything from the interest rate to the length of the loan is negotiated between the buyer and the seller. This is a great opportunity to purchase a home with a much lower interest rate, and it’s also great for individuals who are self-employed or may not look as good on paper to a traditional lender. Savvy sellers are offering seller financing up front, but if you find a property where you know the seller doesn’t have a loan or their balance is relatively low, you can suggest seller financing too. Ultimately, the buyers and sellers goals will dictate the terms and conditions of the loan. You can expect to discuss the down payment, interest rate, length of the loan, first payment date, whether taxes and insurance will be escrowed or not, and penalties when negotiating seller financing terms.
Even if the seller does not own their home outright, they may still be able to offer a form of seller financing. A wrap-around loan involves two home loans, the original loan between the seller and the bank and a new loan between the seller and the buyer. Imagine a seller purchased their home 4 years ago for $450,000 at an interest rate of 3%. They agree to sell their home for $600,000 and offer an interest rate of 5%. The seller will receive an initial payout at the time of closing in the form of the buyer's down payment and then will make money on the spread between the two loans each month. The exact terms of this arrangement will be spelled out in a promissory note, and the buyer and seller may choose to use a servicing company to simplify the relationship moving forward. Each month the buyer makes a payment to the servicing company. The servicing company pays the seller’s mortgage and then disburses the remaining funds to the seller. Wrap-around loans can be risky, but they can also be incredibly advantageous to both buyers and sellers. If you’re considering purchasing a home which involves a wrap-around loan, it’s prudent to hire an experienced real estate attorney to review the contract terms and legal documents.
While it is rare to see in residential home loans, there are some loans that are assumable. This means that you can assume the sellers current loan terms. If a seller financed their home in the past few years, this means you may be able to assume a loan with an interest rate in the low 3s! Sellers with an assumable loan should be clearly advertising this unique selling feature so keep an eye out for it in listing remarks. If you find a property you want to purchase with an assumable loan you most likely will still need to qualify with the original lender, but if you do you could get a loan with an interest rate that’s half of the current rate. When you assume the loan, it’s likely that there will be a substantial difference between the remaining loan amount and the purchase price. This means you will have to bring a higher down payment to the table or consider a second loan for the difference. A second loan would need to be approved by the original lender. Sure, there’s lots of technicalities when it comes to the feasibility of a loan assumption, but they offer a great opportunity too. You can get an incredibly low interest rate, and you’ll likely pay less in fees. While many banks charge loan assumption fees, they’re generally lower than an origination fee.
Now is a great time to purchase real estate if you are creative with your financing strategy. It’s important to have an experienced professional to guide you through these various options, and help you identify the best ones for your unique situation. If you need an experienced REALTOR in Austin, Texas, contact us today.
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