Source: Andrea Riquier, Realtor.com
1. Mortgage rate buy-downs
Mortgage rate buy-downs have attracted attention ever since rates shot up in mid-2022, and for good reason: They remain one of the easiest ways to make a dent in higher financing costs.
In essence, someone makes an upfront payment to lower the monthly interest rate for the first few years of the loan. That someone may be the seller of the property or the homebuilder if you’re buying new construction, if you’re in a position to request some concessions from either. It can also be you.
One of the most popular products, the 2/1 buy-down, for example, entails an upfront payment to reduce the first year’s interest payments by 2 percentage points and the second year’s interest payments by 1 percentage point. By the third year, the original interest rate kicks in.
But many homebuyers taking on buy-downs expect to watch the mortgage market, hoping for a chance to refinance into a lower rate permanently at some point.
“Right now the 2/1 and 3/2/1 buy-downs are one of the more common things we see, and really does make sense for a lot of buyers,” says Leslie Bandy, a real estate agent with Red Oak Realty in Oakland, CA. “We do not see these high rates sticking around. We may not get down to 3% but hopefully 5% in the not-too-distant future.”
Lenders say it’s critical to do the math on all varieties of buy-downs and see what is most comfortable for you.
Brian Weinberg, a loan officer with Planet Home Lending in Denver, says that in his local market, conditions still strongly favor sellers, who have little reason to offer concessions.
Instead, many borrowers have taken advantage of a 1-year buy-down paid by Planet, which offers that deal in the hopes those clients will stay with the company for the long term.
“It’s a no-brainer for the consumer,” Weinberg says.
One important thing to keep in mind: You need to qualify for the higher monthly payment that will kick in after the buy-downs fade away.
2. Seller financing
Another strategy that’s grabbed attention recently is seller financing. Just as it sounds, this involves a homeowner giving a home loan to the buyer of the property, who then pays the seller back plus interest. The buyer hopefully benefits with a lower interest rate than what a bank offers, while the seller benefits by being paid back at an interest rate that’s likely higher than what a savings account or CD would yield.
“Seller financing is a great strategy for buying and a great strategy for the seller,” says Josh Dobson, a lender at BluPrint Home Loans in Modesto, CA, who goes by @mortgagedadof3 on TikTok.
This is especially true in situations where the seller doesn’t want to take a lump sum of cash, and all the capital gains implications that may go with it.
Dobson and other experts caution that it’s critical to make sure all the t’s are crossed and i’s are dotted. Use attorneys to draft the agreement, make sure you know who’s responsible (the buyer or the seller) for paying the property taxes, and be absolutely sure the title to the home is clear.
Even with those precautions, some experts remain wary.
“These may offer an alternative pathway to homeownership for some families, but they are typically riskier than mortgages,” says Tara Roche, project director with the Pew Charitable Trusts.
Consumer protections, if there are any, tend to be governed by state law, not the federal guidelines that emerged out of the subprime crisis, Roche notes.
What’s more, if you enter into this kind of agreement, you almost certainly will not be able to qualify for many traditional bank products like home equity loans or lines of credit, nor the kinds of homeowner protections that may arise in emergencies, such as the COVID-19-era forbearance programs.
Still, many real estate professionals who work directly with buyers and sellers say it can work.
Red Oak’s Bandy represented the buyers in a deal where the sellers wanted to provide financing, and would have been able to offer a much lower rate than a bank or other traditional lender.
“We would want to have everything reviewed and make sure any potential questions that we or the lawyer could come up with would be answered,” Bandy says. “But it does seem that in certain situations, it could be a win-win.”
3. House hacking
Buying a home that may double as an investment property might be counterintuitive if you’ve been struggling to find something affordable, but it’s one of the most tried-and-true approaches to becoming an owner, and it’s seeing a major resurgence today.
“I call it house hacking,” says Julie Chang, a San Diego–based agent with Pacific Sotheby’s International Realty. “It really is about lowering the cost of living.”
Instead of searching for the elusive single-family dream home, for example, you might buy a duplex and rent out half of it. You might buy a property with an accessory dwelling unit and rent that out. Or you may even be able to swing a 3-4 unit building and rent out all of the units you’re not living in.
Chang has helped several buyers achieve homeownership this way, and when the math works out, she says, “You can live nearly for free. You can’t beat that!”
The most important takeaway for buyers is that you do not need 20% down. Just like with mortgages for single-family homes, you may be able to finance with as little as 3% down.
There are, of course, many considerations. Some lenders and mortgage programs will allow you to apply the rent you expect to receive to your income to qualify for a bigger mortgage, but some will not. Some will allow that income to be considered, but only for long-term rentals, not shorter ones like those on Airbnb. Similarly, some cities and states have very strict requirements about whether and under what circumstances they’ll allow ADUs and short-term rentals.
You must also take into account the time associated with being a landlord—dealing with toilets and tenants, as the saying goes.
But on the flip side, Bandy points out, many of the expenses that may come along with homeownership are now business expenses and are therefore tax-deductible.
“It may not fit with your American dream vision of a beautiful house and a yard, but it can be a way to get your feet into the market at an affordable price, and you are building equity and saving money,” she says. “You can find those situations where the rent on a property is going to take care of the mortgage, and you can get into that for a low down payment. You have to get your foot in the door wherever you can.”
4. Down payment assistance and first-time buyer programs
Another way to get your foot in the door: tapping one of the nearly 2,000 programs across the country that offer financial help with your down payment. These down payment assistance programs are one of the best-kept secrets to buying a home.
Contrary to what some may believe, you do not have to be a first-time buyer to qualify for assistance—although there are also plenty of resources specifically for first-timers.
Buyers can find programs in their area at Down Payment Resource. Every state also has what’s called a Housing Finance Agency, which can be a helpful resource in many ways.
These programs may offer down payment assistance, first-time buyer assistance, closing cost help, and so on. You might need to meet residency requirements, or buy only in certain geographic areas, or occupy the home as your primary residence for a certain period after buying, so make sure you understand all the fine print.
In addition, many private lenders have similar programs of their own. Dobson says his company has two down payment programs that may boast looser guidelines than many HFA programs.
“Each program has its positives and negatives,” Dobson says. He advises borrowers to work closely with a lender who can examine all the options and see if any can be combined.
5. Bridge loans
On the other end of the homebuyer spectrum from first-timers are people who are selling one home in order to buy another. Borrowers in that situation—especially at the market’s higher end—might consider a bridge loan to help them make the transition.
True to its name, a bridge loan helps home sellers buy a new house before they’ve sold their current property via a loan using the old home as collateral. Once a seller has bought the new home and sold the old one, the loan is converted into a mortgage for the new home.
Among those homeowners, there’s “more interest than ever in buy-before-you-sell,” says Richard Redmond, a private lender in Marin County, CA, and author of “Mortgages: The Insider’s Guide.” “High-income sellers want to make a noncontingent offer, but a lot of their assets are tied up in the home they currently own.”
A bridge loan will generally cost you about 2 percentage points of the loan amount as an origination fee, Redmond says, and you’ll pay an interest rate roughly 3 percentage points higher than a conventional loan while you’re paying the bridge loan.
“The goal is to sell the departing residence as soon as possible,” Redmond says, and notes that among his clients, the average time is fewer than 90 days.
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