Between rising mortgage interest rates and some of the highest home prices on record, it’s getting more expensive to buy a house. However, owning a home may still be within reach for many Americans, including those with low incomes or less than stellar credit. In this article, buyers can learn about a variety of resources offered by the government, mortgage and real estate industries to help them qualify for a loan and lower their mortgage costs.
According to Downpaymentresource.com, 87 percent of U.S. homes are eligible for one or more homeownership programs. These government-funded programs give Americans with low to moderate incomes access to the lowest interest rates, most flexible terms and deepest discounts. The average program offers $10,000 in assistance and can be used in combination with other cost-saving measures. The most common programs include:
- Low income mortgages: There are several kinds of loans available to help buyers in different situations, from veterans, public workers and residents of rural areas to those who lack the cash or the credit to qualify for a conventional loan. Click here for an overview of each type of loan, who may benefit most and why.
- Down payment assistance (DPA) programs: DPA programs provide grants or low/no-interest loans that buyers can use toward a down payment, closing costs, prepaids, principle deductions or repairs. Most programs are available through state housing finance agencies, but buyers who do not meet eligibility requirements can explore DPA programs from private companies.
- Mortgage credit certificates (MCCs): First-time homebuyers and those who haven’t owned in the past three years may be eligible to use MCCs to help them qualify for a loan. MCCs return a portion of the annual mortgage interest paid (up to $2,000) to buyers as a federal income tax credit. These credits lower the buyer’s annual taxes over the life of the loan, which means buyers with a 30-year mortgage could get up to $60,000 back.
While real estate and mortgage industry professionals have enjoyed a housing boom for the past seven years, they’ve also taken measures to help buyers keep up with rising costs.
Some real estate professionals have switched from traditional commission fees, which are based on a percentage of a home’s sale price, to low, flat-fee commissions to appeal to clients in high-priced markets. Many builders continue to build homes, thanks to lenders who are extending more credit so people can buy them.
Some new lenders are using technology to offer a more holistic approach to the lending process – a strategy that appeals to millennials who account for 45 percent of current mortgages. For example, new underwriting programs evaluate much more than a credit score; they also use factors like education and work experience to calculate the safety of a loan. Certain lending platforms allow customers to share tips and information about the lending process with one another. Some lenders offer flexible payment plans or free online courses that teach fiscal responsibility. Others have adopted innovative business models, like peer to peer lending, that give borrowers the opportunity to help one another and earn a return on their investment.
Strategies for Lowering Costs
All lenders have criteria that buyers must meet to qualify for a loan. Most include minimum income and cash requirements. Fortunately, many lenders allow buyers to take advantage of financial tools and strategies that can help them meet eligibility requirements or lower their costs. Some programs even put money back in buyers’ pockets.
- Mortgage insurance (MI): Saving for a 20 percent down payment on a home can take some time. MI gets buyers into homes much sooner and helps them start building equity right away. Without it, buyers may not be able to save fast enough to keep up with home and rental prices that rise every year. Some programs allow buyers to utilize seller or builder credits (see below) to lower their monthly MI payments so they can qualify for a loan. Buyers may also be able to cancel their MI policy once the principal balance of the mortgage is 80 percent of the original value of the home. As long as payments are current, MI must be automatically canceled when the loan-to-value reaches 78 percent.
- Lender credits: Purchasing lender credits, also known as buying down mortgage points, is a great strategy for buyers who plan to stay in their home indefinitely or need help covering closing costs. Buying discount points permanently reduces the mortgage interest rate, which lowers monthly payments and can save buyers tens of thousands of dollars in interest over the life of their loan. Some lenders also allow buyers to purchase origination points and roll the cost into their loan, so they can access cash to close.
- Seller credits: Seller credits are similar to lender credits, except the seller covers the cost instead of the buyer. Sellers sometimes offer credits to attract buyers to a stale property listing. Buyers can also request seller credits to help them meet loan eligibility requirements or lower nonrecurring closing costs, usually between 3 and 6 percent of the home’s sale price.
- Builder credits: Builders sometimes offer incentives to buyers who finance their construction loan through the builder’s preferred lender. It’s not unusual for builders to offer credits equal to 2 or 3 percent of the home’s base price, total sale price or loan amount. Buyers are not required to use a builder’s preferred lender, but they can use builder credits to lower their closing costs or mortgage premium, or to negotiate a comparable deal with a non-preferred lender.
- Home equity loans: Home equity loans allow homeowners to borrow against the current value of their home, less what they still owe on their mortgage. According to the latest CoreLogic Homeowner Equity Insight report, the average American homeowner earned approximately $12,400 in equity during the past year. That cash can be used to pay off debt to help homeowners earn a better interest rate on their next home. Homeowners can also use it to make improvements to the property that will increase its resale value. Those profits can be applied toward a down payment or closing costs for their next home.
- Jumbo loans: Jumbo loans exceed conventional loan limits ($484,350 in most states) and give buyers the ability to break into high-priced markets. Without jumbo loans, buyers interested in more expensive properties would have to take out two conventional loans or pay cash to pick up where one loan leaves off. Since jumbo loans have much higher loan limits, they’re accessible only to buyers with higher incomes, good credit and ample savings. These loans can be used to free up cash when purchasing a primary residence, vacation home or investment property.
Wherever the housing market heads next, industry leaders are taking steps to help buyers realize their dreams of homeownership. Buying a home is a process. It’s also one of the largest investments most people ever make, so it’s important to protect it with an owner’s policy of title insurance. This one-time cost, paid at closing, is typically less than an annual auto insurance premium but it protects your ownership rights for as long as you or your heirs own the property. For more information about title insurance, contact your local Old Republic Title representative today.
These are the opinions of Eric Lapin and not necessarily reflective of Old Republic Title.
Eric has 25 years of experience in the mortgage industry, which includes origination through servicing, technology, innovation, data and analytics. He is a member of the MISMO Community of Practice for Blockchain Education Committee and a frequent speaker at industry events.