Loyal subscriber Johannes Grad has challenged me to explore financing options in very expensive housing markets, such as the San Francisco Bay Area where he plans on becoming a first time buyer.
Even though the national median house price has dropped to the $170,000 range…that is little comfort in a market where the median price is more than three times that figure.
I wish I could recommend that buyers work with loan brokers…there must be some good ones out there somewhere. But recent history has shown that the largest commissions were paid by lenders for the worst and most expensive loans.
Here are some options worth considering:
1. See if the seller will “buy the loan down”
When you buy from a motivated builder, they have the option of “buying the loan down”. This is mortgage lingo for a subsidized, below-market interest rate.
There is a big gap between conforming loans ($417k max) and the jumbo loans over that figure. But you might twist the seller’s arm to buy the rate down closer to what the conforming rate would be.
This is money right out of the seller’s pocket, but some builders will do this as a hidden concession, to support their pricing integrity.
You may not get it, but you’ve got nothing to lose by trying. Builders are desperate to get out from under their construction loan, so the leverage is with the buyer.
2. Surprisingly, FHA financing has higher limits in more expensive markets.
The limit for Dallas and Houston is just $271,050…but it jumps up to $729,750 in the Bay Area. This will involve FHA insurance and points and origination fees, but offers the advantage of a modest 3% down payment.
3. Go the conventional route.
The conventional loan limit of $417,000 (where you will find optimum rates) is the cutoff for rolling the loan over to Fannie Mae and Freddie Mac. Doing some reverse engineering, that equates to a $521,500 purchase price at exactly 20% cash down.
You will not find your dream house at this market, but you may find a trashed out foreclosed home with an algae infested pool. Hey—that’s why they call it sweat equity!
To make this work in a high priced market, buyers must go through an attitude adjustment. This requires an opportunistic approach to the market…using what is available as an intermediate step towards your goal.
It’s your call.
After a heroic cleanup and fixup, you could then sell in two years when prices have recovered, and qualify for a tax free gain of up to $500,000.
And then you will be able to leverage yourself into the home you always wanted.
One step backward (or sideways) , to advance two steps forward.
Johannes, let us know how it works out for you. Good Luck.