There is a cost to waiting for rates to decrease
In 2023, interest rates were the hot-button topic in the real estate industry, or worse, a thorn in the side of buyers and sellers now forced to navigate a more challenging landscape when it comes to lending.
Things are looking up in 2024, or at least they aren’t going any higher, for now. “Interest rates hit a high in October 2023, and they have come down since then,” says Kathryn Pedersen, Originating Branch Manager, CrossCountry Mortgage. “Rates may be better than people think.”
While it’s impossible to predict where rates will go in the upcoming year, Pedersen warns buyers not to wait. “At this point waiting for interest rates to go down is going to be detrimental because inventory is still very tight, and supply is low. This is true not just in our local markets, but nationally,” she says. “Whenever you have low inventory, it automatically moves prices up.”
Pedersen says the expectation some buyers had that prices would decline and chose to wait last year never materialized. “Housing prices weathered those high interest rates, so most price categories never dropped,” she says.
Even though interest rates have decreased somewhat since last fall, lending is still a challenge, especially for first time buyers. The industry has responded with creative financing solutions to help buyers make up for the cost of borrowing and for home prices that continue to rise despite these challenges.
Temporary buydowns continue to be a popular option for people who need to maintain buying power to be able to afford today’s prices. This program reduces the homebuyer’s payment for the first year, and in some cases for the first two or three years. For example, a buyer’s interest rate may be reduced from 7% to 6% for those first year or two of payment. This buydown is typically subsidized by the seller as a closing cost. “That’s helping out a ton of buyers,” Pedersen says. It basically buys time in the hopes the buyer can refinance down the road at an interest rate that makes the monthly payment doable in the long run.
Permanent Buydowns are another option for buyers to reduce high interest rates. “We take a seller credit and use it to permanently buy down the interest rate,” Pedersen says. “Let’s say the seller is willing to offer a $10,000 credit. That money is then used to pay points to get a lower interest rate on their entire 30-year loan. This in turn, helps the buyer to qualify for a higher loan amount.” It’s a win-win for both parties. The buyer may then qualify and the seller can get the asking price they want.
Another option is Bank Statement Loans, which allows a buyer to qualify for a loan using bank statements instead of tax returns. “This is a great option for someone who is self-employed, especially if they had a better year last year than the year before. It’s also used for simplicity’s sake, say, if a buyer hasn’t filed their tax return yet. They can qualify using bank statements instead.” Pedersen says this type of loan is becoming more utilized as another creative solution to help buyers who might not otherwise qualify.
Another option is a program often used for a residential income producing investment property, a Debt Service Coverage Ratio or DSCR. In this case, a lender looks at the income from the property that’s being purchased to qualify a buyer for the loan. This is especially useful in a mountain resort town like Steamboat where buyers are often looking at this type of property.
“Sellers in general are becoming more flexible with helping buyers in credit and incentives,” Pedersen says. “That’s another reason it’s a good time to buy.” Pedersen says lenders are becoming more creative with strategies to help more buyers to qualify. One of the most common and simplest scenarios she says is becoming more common are gifts. “Honestly, a ton of people are getting help from family, whether it’s cash or cosigning, or whatever it takes. Even $10,000 can change things.”
In general, Pedersen recommends talking to your lender about current rates and what you can do to qualify. “A lot of people don’t realize there are loan programs out there that might allow them to qualify with very little down.” The Yampa Valley Housing Authority, for example, has a down payment assistance program that awards up to $20,000 for people who qualify.
No matter what strategy you’ll need the one thing Pedersen strongly advises buyers not to do is wait.