It is now more difficult to finance a home due to rising mortgage rates, which are at their highest levels in more than 20 years. Nevertheless, hundreds of thousands of individuals purchase homes each month out of necessity or want.
NerdWallet consulted real estate brokers and mortgage loan officers for tips on how homebuyers may stretch their budgets during this period of high interest rates, as the 30-year fixed rate has risen to 7%. They recommended the following nine strategies.
1. Requesting a lower mortgage rate from the seller
Since rates spiked in early 2022, temporary mortgage rate buydowns have become routine. In a temporary rate buydown, a portion of the buyer’s interest payments are paid in advance by the seller. For the first year, two years, or three years of ownership, this lowers the mortgage payments.
According to John Bianchi, executive vice president for loanDepot, “this is a common strategy for new-home builders, but it can also be used in the purchase of resale homes.” (All sources for this article provided comments through email.) “Negotiating a temporary buydown with the seller can help soften the blow of high interest rates, reducing your monthly payment for one to three years.”
According to one common arrangement, the seller’s payment effectively reduces the buyer’s interest rate by 2 percentage points in the first year and by 1 percentage point in the second. The purchaser then pays the entire interest rate. A 2-1 buydown is what this is called.
Another choice is to use discount points to lower the mortgage rate permanently. Each discount point typically lowers the interest rate by about 0.25 percentage points and is equal to 1% of the loan amount.
“Home buyers have the opportunity to get a seller to pay for these methods to lower their interest rate,” said Chuck Vander Stelt, a realtor in Valparaiso, Indiana. Some homebuyers should seriously think about negotiating a higher price with the seller in exchange for a significant closing cost discount, and then use those monies to reduce the interest rate as much as feasible.
2. Pay off debt with some of your down payment
Lenders take into account your overall debt payments for the house, automobile, student loans, and credit cards when you apply for a mortgage. David Kuiper, vice president and senior mortgage banker for Dart Bank in western Michigan, explained that there are occasions when it makes sense to shift some of your planned down payment funds in order to pay off the higher-rate loan first.
The planned purchase will be more affordable because the overall debt and payments are smaller even if the mortgage payment would be slightly higher, according to Kuiper.
3. Utilize programs to assist homebuyers
Numerous initiatives are supported by state and local governments to lower the cost of housing for buyers, particularly first-time buyers. Some organizations provide assistance with closing expenses and down payments. Others provide tax breaks or favourable interest rates.
State and municipal governments support a number of efforts to reduce housing costs for buyers, especially first-time buyers. Some organizations offer help with down payments and closing costs. Others provide favorable interest rates or tax benefits.
4. Ask the seller to provide the financing
You can offer the seller an IOU for a portion of the property’s worth and pay them directly each month at a cheaper interest rate than you might get from a bank. The term “seller financing” refers to this arrangement, which dates back to the early 1980s when mortgage rates spiked as high as 18%.
Why a seller would accept such a deal may be a mystery to you. According to Janie Coffey, who is the team leader of the Coffey Team with eXp Realty in St. Augustine, Florida, “they will frequently do this in order to get the price they want.” While you receive a lower interest rate, the seller receives the entire asking price.
Seller financing typically involves a deadline: the buyer must obtain a mortgage from a lender to cover the amount owing to the seller within three, five, or ten years. According to Coffey, the kind of seller that is amenable to this arrangement frequently has paid off the mortgage “and is OK to wait for their big payoff.”
5. Do not wait for a better rate
“If the right house comes along and the payment is affordable (even if you don’t like the interest rate), you should buy the house,” Kuiper said.
You often hear that you should buy now and refinance someday, after interest rates fall. That’s not Kuiper’s point. His point was this: If mortgage rates fall, more buyers will rush into the market. They’ll make competitive offers and drive home prices higher, “essentially wiping out any advantage of the lower interest rate.”
6. Don’t let unnecessary stuff divert your attention.
Some sellers fear accepting an offer from a buyer whose mortgage application is ultimately rejected, seek flexibility about the closing date, and would prefer the buyer undertake repairs.
Vander Stelt suggests remaining flexible with the rest of the offer on the house while maintaining your pricing emphasis with these sellers who want to avoid hassles. To do this, he advised, “offer the best conditions you are able to, such as purchasing the property in its current condition, a closing date, and a possession date that works best for the seller, and demonstrate how strong of a candidate you are to get your mortgage approved.”
By displaying a preapproval letter and revealing financial details, such as account balances that show you have the money for the down payment, you may show that you’re a great candidate for a mortgage.
7. Purchase a house that need work.
Investing in a fixer-upper is a tried-and-true, traditional method of cost-cutting. According to Brian Koss, regional sales director for Movement Mortgage in Danvers, Massachusetts, “if you can be patient, it’s worth buying a home that needs work and slowly fixing it up over time or taking a renovation loan to acquire the home and do the work upfront.”
8. Build a home or purchase a new one
According to Jeffrey Ruben, president of WSFS Mortgage in the Greater Philadelphia region, “Building a new home can provide more certainty about how long you will have to wait to move in, it can provide more cost certainty, and it can save you money in the short and long term by avoiding costly remodels, appliance repairs, and unexpected repairs of older parts of the home.”
Some of the same benefits apply when purchasing a brand-new house in a development. Additionally, there aren’t many existing homes available for selling, which gives today’s purchasers additional reason to look at new construction.
9. Rental of a portion of the home
“Buying a property like a duplex, where you live in one unit and rent out the other,” Coffey advised, “where you live in one unit and rent out the other.”
You can use the anticipated rental income from the other units when determining your eligibility for a loan if you purchase a duplex, triplex, or quadplex and live in one of them. A basement apartment or a modest cottage in the backyard are examples of auxiliary housing units that may help you qualify for a mortgage by generating predicted rental revenue.
If you purchase a home today, you will be subject to high mortgage rates for the foreseeable future. However, if you use your imagination, you might be able to afford to buy a property.