Article By: Jim Porter – November 24, 2023
New home builders across the country have given record-breaking financial incentives to homebuyers in 2023 to motivate buyers off the fence. Interest rates have come down a bit for the first time in three months but remain well above 7%. A dozen eggs, a carton of milk and a gallon of gas are more expensive than the holidays in 2021.
Home builders do not like to reduce prices or, as Realtors have called it lately, make price improvements. A home builder selling a $700,000 house will give a homebuyer a “free” $7,000 flooring upgrade and $21,000 for closing costs before they would consider giving that same buyer a $28,000 discount off the price.
The sales price of a home becomes a public record once the escrow closes and appraisers, lenders and future buyers can see what that buyer paid. Builders want to keep their prices high so when rates and demand get better, all they need to do is reduce incentives rather than raise prices. This tactic is not considered artificially inflating values.
Mortgage lenders allow sellers to credit buyers for closing costs from 3% to as much as 6% of the sales price and consider these seller concessions acceptable and customary. Loan officers, like me here in the outer Bay Area, count on sellers to credit buyers with closing costs because cash to close is often a first-time homebuyer’s biggest challenge, and a credit to a buyer for $21,000 to buy down the interest rate is substantially more impactful for a buyer’s affordability than a price reduction from $700,000 to $679,000.
The $21,000 credit would be more than enough to give a buyer some money for closing costs plus pay for a 2-1 temporary buydown, giving the buyer a payment the first year based on an interest rate near 5% today.
Jim Porter, NMLS No. 276412, is the branch manager of Solano Mortgage, NMLS No. 1515497, a division of American Pacific Mortgage Corporation, NMLS No. 1850, licensed in California by the Department of Financial Protection and Innovation under the CRMLA / Equal Housing Opportunity. Jim can be reached at 707-449-4777.
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