You might find yourself wondering how your friend, who seems to be in the same economic pond as you, can afford that sweet three-bedroom, three-bath home (with a finished basement) while you can barely afford your rental.
The answer?
Your friend might have taken out a loan from the Bank of Mom and Dad.
With high housing costs and unfriendly mortgage rates the new norm, many cash-strapped homebuyers are turning to their parents to buy their first home.
“Sometimes parents may buy outright for the kids, or co-purchase or assist with down payment or closing costs,” says Nicole Beauchamp, an associate real estate broker at Sotheby’s International Realty in New York City.
That’s a great setup if you have folks who are willing to bankroll you.
But the scenario can be downright discouraging when your family isn’t rolling in dough and you find yourself on your own competing against “nepo homebuyers.”
Beyond the Bank of Mom and Dad
First, keep in mind that nepo homebuyers don’t necessarily have it made.
They still have to meet loan qualifications, such as income, credit score, debt-to-income ratio, and down payment requirements.
Here’s something else to chew on: All the money in the world might not be enough to get the keys, depending on the kind of home they’re trying to buy.
“I do a lot of work with condo and co-op buyers who may have parents who want to assist in some way,” explains Beauchamp.
“But it can be complicated as some buildings have different rules regarding co-purchasing. They may not allow parents to gift money toward the purchase or buy for their children.”
Another biggie to keep in mind: “Sometimes there are things other than price that can make a deal happen,” says Beauchamp.
Still not feeling confident?
Here’s how to compete if your family’s money is not exactly liquid.
Sellers don’t always pick the highest offer
Contrary to public opinion, money isn’t always everything.
Sellers might need a quick closing to access the proceeds from the sale to purchase their next house.
Or they might need to stay in their house after closing to accommodate the schedule of the seller of the house they are buying.
“Making your timeline coincide with the needs of the seller can be a helpful advantage, and they may even be willing to take a lower offer because of it,” says Bradley Wilson, an agent with Finger Lakes Sotheby’s International Realty in Skaneateles, NY.
Make sure your agent asks the seller’s agent about any specific needs beyond the asking price.
Use a pre-inspection to your advantage
Typically, inspections are ordered and paid for by the prospective homebuyer.
Sometimes, a seller might get a pre-inspection to find potential problems or repairs that need to be made before the home is listed.
With the findings, the seller has a better grasp on the issues and cost of the repairs, which can help them determine a listing price or a strategy for negotiating.
If the house had a pre-inspection, base your offer on the understanding the house comes with these inherent issues that other buyers might want to avoid dealing with.
“Ask the inspector to rank the repairs, and then you, as the buyer, can prioritize them based on necessity,” says Wilson.
Consider dividing the list into repairs that require immediate attention and those that can be delayed a year or more.
If you make a speedy offer and are willing to take on the work, you’ll have a leg up on other buyers who want to haggle over repairs and the list price.
Use homebuyer assistance programs
Need extra cash?
Research government or community-based programs that offer down payment assistance, grants, or low-interest loans for first-time homebuyers.
These programs assist people in fulfilling their dream of owning a home.
However, each program has specific requirements, and individuals must still meet loan qualifications.
And don’t be thrown off by the term “first-time homebuyer.”
You can still qualify if you or your spouse haven’t owned a home in three years or are recently divorced and have only owned a home jointly with a spouse.
Seller financing
In a seller financing arrangement, the seller acts as the lender and finances part or all of the purchase price for the buyer.
This can be advantageous for buyers who might not qualify for traditional financing or who prefer more flexible terms.
Why would a seller do this?
To get the interest on the loan instead of the bank.
“This scenario is dependent on the seller’s appetite for acting as the lender and holding the note,” says Beauchamp.
“And sometimes the terms can be less flexible with seller financing.”
A third-party service can help you manage and understand the costs involved.
Affordable housing programs
Don’t forget to explore government-sponsored affordable housing programs, which offer low down payment options and flexible eligibility requirements for qualified buyers.
“FHA loans are great for first-time homebuyers because of their low down payment,” says Mitchell.
Veterans Affairs loans are a great option for veterans, service members, and eligible spouses.
However, Wilson says that VA loans tend to be the most stringent regarding property requirements.
“USDA loans offer similar conditions as an FHA loan and specifically target rural areas for low-income households,” says Wilson.
Eligible rural properties must have a population of up to 35,000 people, and borrowers must meet specific income thresholds based on where they live.
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