Like many determined homebuyers, an Illinois couple in their 30s -- a teacher married to a sales manager -- were shocked to see the latest rise in mortgage rates. In many areas, prevailing rates have now reached 8% or higher.
“Affordability has become a really, really huge issue,” says Rich Harty, who leads the independent realty firm that represented the Illinois couple.
In pursuit of a “forever home” where they could raise a family, the couple spent nearly a year searching in Morton Grove, a suburban village with easy access to Chicago, where the wife is pursuing a master’s degree in education. There they recently found the perfect property: an updated Georgian style brick house built in 1948.
“They loved the house, but so did four other couples. To compete in the inventory-tight market, they needed a strategy to set themselves apart in the sellers’ eyes,” Harty says. Not only did they offer the owners $15,000 over the list price, but they promised to make an all-cash offer -- which proved to yield them the winning bid.
How did they pull off a contract offer that beat out four other couples? Rather than go to a traditional lender who would have charged them around 8%, they convinced their retired parents to finance the property at a deeply discounted mortgage rate.
“We’re seeing more and more parents stepping in to help, handing over cash from their own accounts so their kids can make the kind of all-cash offers that sellers favor. In effect, the parents are acting like an actual bank,” Harty says.
Of course, relatively few parents of young wannabe homeowners have the wherewithal to serve as a mortgage lender for their grown children. But for those who can afford to do so, making such a home loan can be a win-win transaction.
“This sort of arrangement can be a good investment for the parents, even as their children enjoy significant savings on interest payments,” Harty says. Still, he encourages all the parties involved in the home loan to make it official with documents -- including a promissory note.
“Be sure to ask a real estate attorney to draft all your key documents,” he says.
Here are a few other pointers for buyers:
-- Let jealousy serve as a prod.
Sid Davis, author of “A Survival Guide for Buying a Home,” says that when it comes to financial decisions, people in their 20s and 30s are heavily influenced by their social circles. So once one friend buys a house, others in the same friend group are often motivated to do the same.
“Some folks don’t get off the fence until their friends start to buy,” Davis says.
Besides the problem of affordability, many would-be buyers in their 20s and 30s are held back by a fear of commitment signified by the traditional 30-year mortgage, according to Davis.
“They’re petrified about taking the plunge, fearing they’ll get in over their heads,” he says.
But as Davis tells many young clients, the beauty of a fixed-rate mortgage is that their payments will stay constant, even as their incomes likely rise.
“With the passage of years, those house payments seem to shrink, especially if your place appreciates,” he says.
-- Prioritize down payment savings over shorter-term objectives.
Suppose that while you’re still a renter, you’re invited to a housewarming party at the home of friends who’ve obtained the status that comes with homeownership. Part of you likes seeing your friends successful, but another part feels diminished by comparison.
In this situation, Davis says some renters resort to the short-term gratification of making other, less massive prestige purchases. They may buy a luxury car or an apartment full of new furniture, financing their purchases with credit.
Such purchases weaken your chances of achieving your housing dream because you may not be able to obtain as large a mortgage as you’ll want or need.
“Some people try to lift their spirits about still renting with an extravagant vacation, for example. But, in the end, this is self-defeating behavior if your real dream is a home,” Davis says.
The problem is that lenders look at your overall debt load when judging your worthiness for a mortgage.
“Big balances that appear on your credit reports can hobble your chances for a home. Yet in most cases, a house is a much better investment than a car or furniture,” says Davis, a real estate broker since 1984.
-- Ask for help from your mortgage lender to rectify your credit.
Are you a potential buyer whose credit reports were tarnished by a poor history of paying credit card bills while still in college? At the time, your grades and social life may have seemed more important than your credit score.
Regrettably, financial indiscretions have a way of lingering on your record long after people stop asking about your GPA.
While there’s no quick fix for a poor credit score, Davis says your standing can be restored over a period of weeks or months through methodical effort.
“Most people just have to keep plugging away until they reach their objective of a higher credit score,” he says.
Davis says your best ally in reestablishing good credit is a mortgage lender or broker willing to provide sound advice.
“Even now, with more federal regulations to protect borrowers, it’s helpful to get guidance from a professional who can tell you the letters to write, the phone calls to make and the emails to send to strengthen your credit standing,” he says.
(To contact Ellen James Martin, email her at email@example.com.)