Stephanie Taylor
2022 President, Northern Wasatch Association of Realtors
Housing costs are on the rise due to high home prices and interest rates around 7%. In fact, new research from the National Association of Realtors shows payments on a median-priced home have increased 50% in one year.
“The median income needed to buy a typical home has risen to $88,300 – that’s almost $40,000 more than it was prior to the start of the pandemic, back in 2019,” said NAR Chief Economist Lawrence Yun.
The rising prices have sidelined some buyers, but others are keeping their homeownership dreams alive through creative financing and other buying strategies. Below is a discussion of several non-traditional options to help make homebuying more affordable.
Seller financing
When purchasing a home, a buyer typically secures a mortgage from a traditional lender or financial institution. With seller financing, the seller takes the place of the lender.
In this situation, the seller receives compensation for the home over time as the buyer makes monthly payments. The buyer signs a promissory note that details amount owed, interest rate, loan duration and terms of the financing.
This is good for the buyer because the seller may be willing to offer a lower interest rate and more favorable terms than a traditional lender, especially if they are motivated to sell the home. With seller financing, all the terms are negotiable, and there may be some savings on closing costs.
This strategy should be used when the seller owns the home outright or has enough money to pay off the remainder of the loan. This is because many lenders require full loan repayment upon the sale of a home.
Buyers and sellers using this financing method should work with a licensed real estate attorney, title agent and loan originator to make sure each party is protected and that all laws and regulations are followed.
Loan assumptionsA loan assumption occurs when a seller transfers their mortgage to a buyer who takes over the remaining payments and loan requirements. The interest rate, fees, terms and payments remain the same. This may be advantageous because the seller’s loan may have a lower rate than what you could get today.
A loan assumption is generally available for FHA, VA and USDA loans although each has different qualification requirements and fees. Generally, conventional loans aren’t assumable unless they are adjustable-rate mortgages. That’s because conventional mortgages typically have a due-on-sale clause that requires full loan repayment when the home is sold.
Sellers should check with their lender to learn if their loan is assumable and what is required of the buyer. Sellers will want to make sure the lender releases them from liability should the buyer fail to make future payments.
Finally, in addition to the assumed mortgage, the buyer will likely need a second loan and down payment to cover the difference between the purchase price and the current loan amount.
House with an ADU
Another option for making homeownership more affordable is to rent out a portion of your house. An accessory dwelling unit, also called an ADU, is a separate dwelling unit within a single-family property. Examples include a basement apartment, over-the-garage apartment or detached living unit on the property.
You can use the income generated from an ADU to help offset your housing bills. In fact, some builders are including ADUs in their floor plans as a way to bring more affordability to buyers’ monthly housing payments.
If you’re interested in creating or renting an ADU, talk to your city to make sure they are allowed and that you’re following all regulations and requirements.
To learn more about ways to make your home purchase more affordable, talk to a local Realtor. To find a Northern Wasatch Realtor, visit NWAOR.com.