Highly appreciating home values and rising interest rates are some of the strongest factors putting a strain to affordability. What does this mean for the American home buyer?
Home prices are at their historical peaks in the country’s biggest metros. Interest rates, though remaining historically low, are projected by experts to increase and reach the 5 percent tier by the end of 2018. Mortgage underwriting for conventional loans remain tight. All these converging factors are making homeownership a difficult and maybe even scary decision to a lot of American homebuyers.
Does this mean you should just give up on your American dream?
Perhaps being less informed would easily tempt you to throw in the towel. But do you know that there are actually options you can take to still get a place of your own despite these pressing affordability concerns?
Keep your savings, then save some more.
We are seeing major cities in the country break their records for the highest home prices attained. The pace of appreciation are also at their peak since 2014. Suddenly, many homeowners find themselves unable to afford the conventional down payment on a home they are interested in.
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In such a situation, the home shopper has the following options:
- Pay less than the conventional 20 percent down payment requirement and pay for mortgage insurance because getting a mortgage later could entail higher interest cost
- Take some more time to save until you can pay the conventional down payment amount and avoid the hefty mortgage insurance fees which could total to 1 percent of the entire loan amount on an annual basis.
2. Look for a home elsewhere
This may not be viable for everyone due to work reasons or other personal concerns. But if you can afford to move, you should consider shopping in areas where median prices are lower than national or state averages or where prices are within a range that you can afford.
This is good advice for seniors who want to consider downsizing or retire to a more peaceful community.
3. Look for down payment assistance programs
Every state has their own down payment assistance programs aimed at helping their citizens gain access to affordable housing. Feel free to use our DPA search tool to find more information about your state’s DPA programs.
You may also take advantage of low down payment programs that are insured by the federal government. These include:
FHA loans – backed by the Federal Housing Administration, this loan program offers a 3.5 percent only down payment requirement with competitive interest rates. It’s specially designed to help first time American home buyers. The eligible borrower may have to pay a mortgage insurance premium to help the lender shoulder the risk of the loan. The loan is also assumable which means that when the owner of the home with an FHA mortgage decides to sell his or her property, the buyer can take over the loan payments.
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USDA loans – this home loan program aims to help low-to-moderate income borrowers get homes of their own. Backed by the US Department of Agriculture, a USDA mortgage offers 100 percent financing with competitive interest rates. In order to be eligible for the program, however, the mortgage applicant must be able to meet the income standards set by the department.
VA loans – A VA loan is insured by the US Department of Veterans Affairs and targets military and service members, national guards and reservists either veterans or in active duty, as well as their eligible spouses. This mortgage program insures a portion of the borrower’s loan. Like the USDA loan, the borrower does not need to come up with down payment money. Furthermore, it does not require them to pay for mortgage insurance regardless of whether they put a down payment. Interest rates are competitive, on top of a lenient underwriting process.
Aside from these federal mortgage programs, there are also private home loans offered by banks and credit unions that cater to the changing needs of the mortgagee population.
4. Opt for alternative housing
Most of us are so caught up in working to afford a home that we don’t realize we can actually get creative and explore cheaper, alternative housing ideas. Because why not?
Although most of these choices only work for single individuals, it may also work perfectly well for adventurous families. Some of these alternative housing ideas include:
- Co-living spaces
- Housing co-ops
- Work-trade agreements
- Tiny homes
- Manufactured homes
Knowing these choices hopefully empowers you to not give up just yet and to keep your American dream alive.