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'3% Lower': Making Housing Affordable for Buyers and Sellers!

Updated: Dec 5, 2023

3% Lower Loan Program': 3% Lower Loan Program': Transforming the Housing Market for Buyers and Sellers the Housing Market for Buyers and Sellers

Tackling the Housing Affordability Crisis: Achievable Homeownership in Any Rate Environment

Remember the 3% mortgage rates of 2021? If you're missing them like I am, you'll find the '3% Lower' strategy quite compelling. Born from a deep desire to combat the housing affordability crisis, '3% Lower' offers a novel approach to home buying, empowering buyers with creative financing options to bypass the burden of high mortgage rates.

Rewind to October 2022: Americans believed we had seen the last of skyrocketing mortgage rates as they climbed over 7%. A flicker of hope appeared in early February 2023, hinting at a positive shift. Yet, by October 2023, the situation intensified, with mortgage rates hitting a 23-year high as the average 30-year fixed rate exceeded 8%. These high rates, combined with a limited housing supply, have resulted in an incredibly tough market for buyers, sellers, real estate agents, and mortgage professionals alike.

Developed by Fred Gallegos, a seasoned expert with over 30 years in the mortgage sector, '3% Lower' aims to reinstate housing affordability. Fred's innovative and insightful approach has not only benefitted buyers and sellers in navigating various rate environments but also established him as a leading speaker, educator, and one of the nation's top mortgage authorities.

So, why delay? Explore how a 3% Lower Rate can change your homeownership journey!

The Current Homebuying Landscape

Throughout much of 2023, we've seen mortgage rates consistently stay well above average. By August 2023, the rates for a standard Conventional 30-Year mortgage approached 8%, a worrying trend for buyers, especially when considering the long-term effects on mortgage payments.

Rising Interest Rates

Lets consider a real life scenario to understand this better. Imagine you decide to take out a loan of $400,000. With an interest rate of 3.5% your monthly payment for principal and interest would be $1,796.18. However if we fast forward to todays rate of 7.5% your payment would skyrocket to $2,796.86 per month. That's an increase of $1,000.68 every month!

No wonder many homeowners are opting to stay put of moving and its easy to understand why potential buyers are reconsidering their options – from renting to making significant lifestyle adjustments just to make ends meet. The bottom line is that housing has become unaffordable for people.

The Real Challenge; It's Not Just about the Price

In my conversations with buyers throughout the year one common theme emerges; affordability takes precedence above all else. It's not about the price tag attached to a house; it also includes considering the monthly loan payments along with factors like location, yard size and neighborhood ambiance – everything that makes a house feel like home.

Unfortunately slashing house prices has been the go to solution, for making homeownership more attainable.

Considering the high interest rates we have at the moment this approach isn't really effective.

Why Paying Points Isn't the Perfect Solution

Another strategy that is not delivering the desired results in terms of affordability is paying "points" to lower your mortgage interest rate.

Here's what you need to know about points; each point represents a fee equivalent to 1% of your loan amount. So for instance on a $400,000 loan one point would mean a $4,000 expense. Some people believe this is a trade off, for a reduced monthly payment. However given the nature of the mortgage market these days this can quickly become quite costly.

Just imagine if you were able to reduce your interest rate by 0.5% on that $400,000 loan. Your monthly payment would decrease by $130 – which may not sound too bad until you factor in the initial cost. Many individuals find that the numbers simply don't make sense in their favor.

In general experts seem to agree that our current rate situation is more of an anomaly and are anticipating rates to decrease by 2024. Therefore investing money in points now might not be considered the most prudent decision.

A Journey Back in Time

Question: Remember how the housing market looked in 2021?

Answer: The pandemic era of 2020-2021 saw interest rates plunge to 3% or even lower for 30-year fixed mortgages, igniting a surge of homebuyers into the market. This frenzy drove up home prices, thrusting sellers into an extraordinary 'Seller's Market.'

Homeowners across America witnessed their equity soar. Yet, not everyone could jump into this buying wave. Despite many qualifying due to low rates, the intense competition turned house hunting into a real challenge. Think multiple offers, escalating bids, and the need to drop almost every contingency just to stay in the game.

Let me share a story that really captures that period: Picture a modest Denver townhouse, listed at $450,000, but the offers came pouring in – over $100,000 above the asking price, no strings attached. It sold for a whopping $560,000, even though it didn't appraise for that much. The buyer went ahead with the deal regardless.

This wasn't an isolated incident. Many couldn’t make the most of those incredible rates because they simply couldn't land a winning bid.

Fast Forward to the Present

Nowadays, buyers aren’t grappling with the same level of competition, but the catch? Interest rates aren’t hovering around 3% anymore. So, what's your take?

  • The hustle and bustle of high competition paired with low rates?

  • A calmer scene but with higher rates?

A Thought-Provoking Question

Question: Imagine if today's interest rates were 3% lower. What impact would that have on home prices?

Answer: Just like before, reduced rates would draw in more buyers, spike competition, and push up property prices.

But Here’s an Even More Intriguing Query

Question: What if it was just your property that came with a 3% lower rate offer?

Insights into Today’s Housing Market

The current scene is marked by limited housing inventory and a smaller circle of buyers. Among them, few are highly qualified and motivated, with many hesitant to dive into bidding wars, overpay, or settle for steep interest rates. Their primary pursuit?

Affordability, plain and simple.

Do Assumable Loans Rule the Roost?

Let me paint a picture for you about assumable loans, which have become quite the popular topic lately. Imagine you're selling a property that comes with an assumable loan, sitting comfortably between 2% and 4%. It's highly likely that you'll receive a lot of interest from potential buyers.

So, what exactly is an assumable loan? Well, it's a type of loan that allows the new buyer to step into the shoes of the seller and take over their existing mortgage at its current interest rate. Just to give you an example, I've come across VA assumable loans with rates as low as 2.25%!

However, it's not always smooth sailing when it comes to assumable loans. They come with their fair share of complexities, which I discuss in detail in my upcoming article. If you want to dive deeper into VA loan assumptions and learn more about them, make sure to check out my article titled "Why VA Loan Assumptions in Grand Junction Are Facing Closing Challenges."

Despite their attractiveness due to lower interest rates, closing on an assumable loan isn't always easy. Why? Well, there are a few obstacles to overcome;

  • The buyer needs to meet strict qualification criteria.

  • On average, it takes around 60 to 75 days to finalize the deal.

  • he requirement for a significant amount of money to cover the difference between the mortgage balance and the sale price, along with the associated closing costs.

  • And a biggie for military folks: the risk of losing VA entitlement benefits if a non-VA buyer steps in.

I've witnessed situations where deals were about to close, but fell apart because the seller was at risk of losing a portion of their VA entitlement. (If you want more information on this, check out my article.)

So, here's what it comes down to;

Buyers are attracted to assumable loans like moths to a flame due to their low interest rates.

This opens up various possibilities, but before we explore potential strategies, let's take a moment and consider the top five reasons that are currently holding back buyers.

Five Key Reasons Buyers Are Holding Back

Reason #1: The Rent vs. Buy Dilemma

Many potential buyers are sitting on the sidelines because they see renting as a more affordable option in the face of high interest rates. But is this just a short-term solution? It's worth considering the long-term picture, like escalating home prices and the benefits of owning a property.

As Baron Rothschild wisely said, "Buy when there’s blood in the streets." In other words, the best time to invest is often when it seems riskiest.

Reason #2: Qualifying Challenges

For some, the dream of buying a home is out of reach under the current high-rate regime. It’s more than a mere reluctance; it’s about not meeting the stringent qualifying criteria of lenders.

Reason #3: The Myth of a Market Crash

There's a widespread belief that the housing market is on the brink of a crash, which would supposedly lead to lower home prices. This notion, however, flies in the face of basic economics. Given the limited supply of homes, prices are, in fact, more likely to climb.

Reason #4: The Fear of Overpaying

In today's market, a lot of buyers are hesitant to go all-in with bold offers. The worry? Paying too much in a high-rate environment. This caution is certainly understandable, but it also means missed opportunities.

Reason #5: The Affordability Factor

A common refrain among prospective buyers is, "It's just too pricey to buy right now!" But digging a little deeper, it's apparent that the crux of the issue is affordability. The homes people are eyeing are out of reach, not necessarily because of their price tags, but because of the burdensome interest rates.

It's All About Affordability

The main hurdle for buyers today isn't just the sticker price – it’s about affordability.

Attention Sellers: If you're aiming to fetch top dollar for your property, your strategy should center on making it irresistibly affordable.

A Hard Truth

Many realtors and sellers are stuck in traditional thinking, believing that the only way to address buyer affordability is by slashing prices. But this misses the mark for what buyers are truly seeking, and it’s not the ideal solution for sellers either.

Simply put, cutting the price is not the golden ticket!

The Real Solution

Here’s a clue: It's not about lowering the price.

Our discussions about making homes affordable for buyers have led to an innovative solution: a 3% interest rate subsidy on the buyer's mortgage. This approach can dial back payments to something more akin to 2021's rates, making it a win-win in any market.

Imagine the appeal of shaving 3% off your mortgage rate!

Understanding the Mechanics of '3% Lower'

This 3% subsidy, shouldered by the seller, is seamlessly woven into the property's price, meaning no extra costs for either party involved.

The cost of this subsidy varies based on the loan amount. To give you a ballpark figure, a 3% rate buy-down typically equals about 4.5% of the loan amount. And it’s crucial to note – this isn't an out-of-pocket expense for the seller.

Take this scenario: With a 20% down payment from the buyer, the seller's contribution to the subsidy would amount to roughly 3.64% of the sale price.

Keep in mind, the amount of subsidy hinges on how much the buyer finances – the larger their loan, the more significant the subsidy woven into the deal.

A Glimpse into a Typical '3% Lower' Loan Scenario

Let's take a closer look at what a standard '3% Lower' Loan situation might entail.

3% Lower Loan Program Example
3% Lower Loan Program': Transforming the Housing Market for Buyers and Sellers

Here’s an Example to Consider:

Imagine a house listed for $500,000. We introduce a $20,000 subsidy, nudging the sales price up to $520,000.

What happens next is noteworthy: a 3% drop in the mortgage rate cuts the monthly payment from $3,222.49 down to a more manageable $2,445.85. Plus, any part of the subsidy that's not used gets credited back to the buyer once the loan is paid in full.

Why This Works Wonders

For the Seller:

The seller's net proceeds stay the same. We bump up the home's price to cover the subsidy they provide. What's more, real estate commissions are calculated on the original sales price, before the subsidy.

For the Buyer:

Yes, the house’s price tag is a bit higher. But here's the kicker: the extra cash goes into an escrow account, essentially belonging to the buyer. Each month, a slice of this fund is used to subsidize the mortgage payment. If the loan is settled early, any remaining funds go straight to chopping down the loan's principal.

Tackling Common Objections

The Appraisal Concern:

Some worry that a higher sales price might lead to appraisal issues, risking the whole deal. In reality, even with a low appraisal, the loan amount often remains untouched; it's the loan-to-value (LTV) ratio that adjusts. If your lender is okay with a higher LTV, there's no need to change your loan amount, keeping your 3% Lower advantage safe.

However, for deals like a No Money Down VA Loan, a low appraisal can be trickier. From my experience, a higher listing price can sometimes lead to a higher appraisal value. And often, even with a low appraisal, buyers can still secure financing that keeps the subsidy in play.

Remember, mixing cash and financing can keep your subsidy benefits intact.

I Won’t Win the Offer:

A common myth is that suggesting a seller-paid subsidy might weaken your offer's chances. As someone who's navigated numerous transactions, I can tell you that this isn't typically the case, even in competitive markets. The trick is to first get your net offer accepted, then negotiate the subsidy part. It requires skill, but it’s definitely doable.

Remember the adage, "You don't get what you don't ask for"? I’ve successfully negotiated this 3% Lower strategy for myself in a tough Colorado market and helped many others do the same.

The Subsidy Misconception:

Some argue that the subsidy is pointless since it might be lost in a sale or refinance. In reality, the subsidy is designed to lower the buyer's mortgage payments for the first three years. The funds sit in an escrow account, with a portion used each month to reduce the payment. When the loan is paid off, be it through refinancing or selling, any leftover subsidy money is used to reduce the loan balance. Essentially, it's the buyer’s money.

Got Questions?

This program has been a game-changer in making housing more affordable for both buyers and sellers.

I’ve put together an Excel sheet that vividly demonstrates the impact of this program, detailing the financial nuances for both parties.

Interested in getting a copy or have questions on how to secure a 3% Lower mortgage? Feel free to email me. Realtors, buyers, and sellers – I'm here to help everyone!

Building Your Dream into Reality

Homeownership can be achieved, but like any major milestone it requires careful planning, persistence and expert advice. I specialize in mortgage lending throughout the State of Colorado, with an eye toward education - my aim is to make your dreams of homeownership in Colorado come true!

Start Your Home Buying Journey Now and Unlock Success Now

Are You Ready to Explore Colorado's Real Estate Market Confidently? I can assist in crafting a bespoke plan tailored specifically to meet your needs, contact me now at 970-855-9009.


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Disclaimer: Fred Gallegos is a licensed loan originator who specializes in Colorado and operates this blog as an individual. Although his aim is to provide accurate and up-to-date information, this should not replace official regulations and guidelines.


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