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Buyers and Sellers Team Up on Financing

Let’s start with the premise that buyers do NOT buy big ticket items (like a home or a car) based on its sales price; rather, they buy based on their proposed monthly payment (or cost).

Additionally, when looking to sell your home with so much availability of homes on the market, the biggest challenge a seller faces is DIFFERENTIATING their home from the rest.

Why not combine the WANT of the buyer (lower monthly costs) with the NEED of the seller (differentiation) through presenting different financing options?  The next three blogs I contribute will discuss different scenarios surrounding this thought process:

  • Scenario #1: FHA ARMS
  • Scenario #2: 2-1 Buydowns
  • Scenario #3: Purchase Reverses

Scenario #1

An FHA 5/1 ARM

I know, I know….ARMS are blasphemous.  But listen– in a rising interest rate market, they become a necessity.  Someone who qualifies at 5.5% may not qualify at 6% or 6.5%.  Moreover, this loan product is AWESOME.

The FHA 5/1 ARM works like this:  the interest rate and payment remains FIXED for 5 years and amortizes just like a fixed rate loan.  After that, the rate can change annually, but the beauty of the FHA ARM products is that they cannot change more than 1% in any given year and no more than 5% lifetime.

For comparison purposes only, if a seller wanted to pay 2 points on behalf of a buyer today, we would be looking at an interest rate of 3.75% for the first FIVE years.  Assuming the WORST CASE, Year-6 would be at 4.75%, Year-7 at 5.75% and Year-8 at 6.75%.  That would give a buyer an average interest rate of 4.5% over 8 years… in a worst case scenario.  That is significantly better than the 5.25% FIXED RATE loan they would get today.  On a $300,000 mortgage, the buyer will save more than $267 every month for the first 5 years (or about $16,000 in total).

So rather than lower the sales price $6000 (on that $300,000 home), why not offer to pay the $6000 in discount points and make your home $267 cheaper than the neighbor’s home for the first 60 months???  From a buyer’s perspective, lowering the payment $267 is the cash flow equivalent of a $48,000 price drop.  That is HUGE!!!

What about potential increases?  Two things:

  1. We all believe that our incomes will be higher 5 years from now (just due to inflation), so if the payment does go up, it won’t be as painful.
  2. How long will the buyer stay in the home?  If they are typical and stay about 7 years, and they get the worst case scenario, they will have an average interest rate of under 4.5%.

And it all comes with the benefits of FHA financing, higher LTVs (only 3.5% down payment required), expanded ratios, the liberal use of gift monies, and more tolerance for credit challenges.

More affordable…..makes buyers BUY.  More creative approaches….makes more homes look attractive.

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  1. […] is a method to satisfy both Buyers and Sellers.  Part I of this three part series discussed FHA ARMs, today we will talk about 2-1 Buydowns.  Buydowns can be done on practically any fixed rate […]

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