Housing affordability is the worst in decades
“The rule of thumb is that the cost of your house should equal roughly 2.6 years of income. But in some U.S. cities, home prices are almost 10 times what the median household earns.” This was the first line on a popular national outlet on housing. Yikes, right?
I have to believe Indianapolis, ranked 6th most affordable large-metro area in the nation, is on the better end of this situation, but still… Yikes! A concoction of 7% interest rates, double-digit appreciation, and economic stagflation has gotten into quite the mess. Especially if you don’t own a home yet, but desire to buy one.
What if there was a way to make owning a home affordable again?
Sit tight. I’ve crafted these strategies from battle-tested experience out in the field, working with too many first time buyers to count…
Strategy #1: The CRA Loan – Buying a home for 1% down.
The Community Reinvestment Act was passed in 1977. In a nutshell, it specifies a certain amount of Federal funding for communities in order help people buy their own homes. Sounds pretty great right? It really is.
How to use it? You need to find a lender (usually a local one) that works with these programs. Right now, in Indianapolis I am in touch with two banks that use CRA funds to provide super-optimal low-downpayment loans. These are not scams. They are legitimate products, and highly under-exposed. Some example banks I’ve personally worked with include hyper-local friendly banks like BMO Harris and Jackson County Bank.
What’s the benefit? With BMO Harris, most first-time home buyers qualify for free grant money. I’ve seen this grant be as large as $20,000. That would be $20k of free money the bank can use to help you with downpayment and closing costs. With Jackson County Bank, there is a unique program called MortgageMadeSimple. It’s an Adjustable-Rate program that allows for 1% down. The rate will reset in 7 years, with provisions that allow for a refinance at any time. Requirements? You have to at least bring 1% of your own dollars to the table for closing costs, which typically amount for earnest money.
Often, there are stipulations and exclusions based on income-level or county you live in, so it is typically something you need to talk through with a loan professional.
Your next step? Reach out to Roots Realty Co. We have relationships with lenders that use CRA funds.
Strategy #2: House Hack. Live in a multifamily 2-4 unit property or rent out rooms.
My first home was kind of a piece of crap…. Fortunately, the home did have one thing going for it. It had three bedrooms. I lived in one of them, and I rented two to buddies. I charged $450 per room. That meant I received $900 per month, while my mortgage was just over $500… I was cash flowing on my primary residence. What if there was a way to do something similar now? Enter: House hack.
How to use it? Buy a Duplex, Triplex, Quadplex, OR… a Single Family Home. Rent out the other units or bedrooms. Don’t forget to search for homes with a carriage house or a basement that could be converted into its own unit.
What loan would I use? I would use a conventional loan 5-10% down or an FHA loan for 3.5% down. Most all lenders offer these products.
What’s the benefit? Once you run the numbers it becomes evident how well this strategy works:
Mortgage – Rent = What you owe monthly.
Oftentimes, this can get very close to $0. The main benefit to this strategy is that there is nothing stopping you from repeating it again and again. Normally, lender require that you stay in the home at least a year. But then you are able to do it again, and again. Best of all? You get to keep the original home and cash flow on the entire property now that you’re gone.
Your next step? Reach out to Roots Realty Co. Many of our agents have house hacked themselves. We help people execute this strategy all the time.
Strategy #3: Ask the seller to buy-down your interest rate.
Most people are unaware of an incredible negotiation strategy when placing an offer in on a home: the “Two-One Rate Buy-down“.
How to use it? Ask your lender how much it costs to have the seller pay for 2% of the interest payment the first year, and then 1% of the interest payment the second year. Then, have your realtor write in a “two-one rate buy-down” paid for by the seller. I have written this in for numerous clients I’ve worked with as their realtor. Here’s the catch, I would never use this on a super competitive deal. Usually, it’s best to leverage this when you actually have leverage (higher days on market homes, such as over 20 days).
What’s the benefit? Instead of a 7.5% interest rate, you’d be looking at a 5.5% rate the first year, and then a 6.5% rate the second year. Then it would go back to normal. However, if rates drop between then you can always refinance into a lower interest rate. Type this in on a mortgage calculator to see how much this will save you. Hint: it’s a lot. I have saved buyers upwards of $6000 in monthly payment dollars the first two years using this.
And that’s it! Three strategies to save you money and make buying a home affordable. Can you work all three of them into one deal?