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WNC Business

Creative lending helps buyers navigate market despite increased rates

Mar 16, 2024 08:29AM ● By Randee Brown

A large factor in the current low inventory of homes available for purchase has been the rise of interest rates throughout 2023, according to United Federal Credit Union Mortgage Advisor Patrick Hunt.

After several years of mortgage interest rates hovering around 3%, current homeowners don’t want to trade in those low rates for rates around 7%. If those homeowners are not willing to sell, that means fewer homes are becoming available for buyers entering the market.

Lenders offering mortgages for land and construction saw more business through the end of 2023 than those who do not. Low housing inventory means more people are considering building their own homes, though there are certain criteria and guidelines that must be met for these types of loans. 

“Land must be suitable for building for someone to acquire a loan,” Hunt said. “A septic permit must be obtained so the soil must be tested. There are also limits on acreage.”

United Federal Credit Union offers portfolio loans, meaning loans that are not sellable to investment companies like Fannie Mae or Freddie Mac, according to Hunt. Portfolio loans may mean more flexibility for buyers, allowing loans that may not be possible elsewhere as long as the risk is manageable.

“People may feel ‘shooed away’ after working with other lenders that keep telling them no,” Hunt said. “By having real, in-depth conversations with local lenders, people working toward buying may feel more encouraged to develop a plan and a process to obtain qualifications needed to make purchasing a reality for them. It’s not a prohibitive market, but people need to have realistic expectations.”

Hunt said many buyers perceive a misconstrued timeline for when they can actually make their home purchase. While some programs offering 100% financing are available, they are not for everyone nor are they offered in every geographic location. The past several years in which mortgages came with a 3% to 4% interest rate gave people the ability to get prequalified quickly, but that is no longer the case.

Those that would have been prequalified for a mortgage of $400,000 in 2021 may have only qualified for $275,000 in late 2023, according to Hunt. If they are looking for a similar quality, style, and size of home, buyers are having to look farther outside of metro areas to find properties that meet their expectations.

“Those low interest rates were nice while they lasted, but they are not the norm,” Hunt said. “As people are getting used to what rates are looking like now, they are starting to get off the sidelines and jump back into the market, but they can’t get what they’d have liked to a year ago. Starter homes are starting to look like starter homes again.”

Creative lending solutions can provide more options for buyers, but Hunt said buyers have to be cautious. Borrowing more than what the property is worth can be risky, and lenders have to make sure debt-to-income ratios stay within guidelines.

Many loans have a maximum loan-to-value ratio of 97%, but it’s possible for buyers to obtain a separate loan for a down payment in addition to their mortgage loan.

“As lenders, we have to remind buyers to be cautious not to put themselves in a position where it will be hard to make their payments,” Hunt said. “Yes, rent payments can be more expensive than mortgage payments, but the last thing a lender wants is to have to foreclose and sell. Online companies don’t often have these conversations with their buyers, but we are here in the community and don’t want the community to struggle. We want people to still be able to enjoy their lives after a purchase.”

Buyers can sometimes acquire seller credits toward their mortgage, according to Hunt. As the market becomes more balanced, some sellers are providing credits toward closing costs, which helps eliminate the need for buyers to spend cash out of pocket. Working with a real estate agent, particularly an agent maintaining relationships with lenders, can be an advantage as they understand the appropriate timing of requests for credits and have ideas on how seller credits could be used. 

People who are ready to purchase may have to deal with current interest rates, but Hunt said property values will only continue to increase. By getting into a home now, buyers will be paying down the principal and increasing equity, which will improve their position to refinance if rates decrease. Waiting to buy may bring lower interest rates, but likely a higher purchase price for the same property. 

“People will always buy and sell homes, and real estate always appreciates,” Hunt said. “There are always life events where people have to relocate. People are always going to need to buy and sell real estate, and the majority will need a mortgage to do so. Lenders will always be around to help families and individuals get into homes. Is it harder now? Yes, but we still have unique things we can do to create opportunities for people to be competitive in this market.”