How do Americans come up with the funds they need for a down payment?
Many of the sources are familiar: savings or family help for first-time buyers, or the proceeds of a sale for those moving up to a second or third home. But one may be more surprising. According to a survey published Tuesday by Freddie Mac, 16% of buyers said they’d had help from their home’s seller.
In some ways, the concept of a seller subsidy seems strange in the housing market, where deals are both personal and individual. Homeowners aren’t car dealerships or big box retailers who develop financing gimmicks for their customers. And any funding strategy that buyers use must conform to strict guidelines from lenders and underwriters, all of whom want to make sure buyers can service a mortgage on their own.
Still, while it may seem incongruous, such subsidies are a reality of the housing market, particularly in areas where demand is much hotter than supply.
“They’re popular and they’re needed,” said Brooke Anderson Tompkins, president of upstate New York-based 1st Priority Mortgage. Tompkins started her career as a lender years before the housing crisis, and she’s seen this strategy used in all kinds of cycles.
|Year||Savings, inheritance, retirement account, other assets||Proceeds from sale of another property||Assistance from a nonprofit or government agency||A second lien, home equity loan, or HELOC||Gift or loan from friend or family||Seller contribution|
|Note: The percentages do not add up to 100 percent as the respondents chose more than one option in some instances. (source Freddie Mac)|
Steven Centrella, a real estate agent with Redfin
in Washington, D.C., estimates he encounters a seller subsidy of some sort in about half of the transactions he works on. In one recent example, his buyer client really wanted an older property, and had budgeted several thousand dollars for expected repairs. But when the results of the home inspection came back, she realized she’d likely have to pay double her original assumptions.
The buyer had a few options. She could have asked the seller to make the repairs – but that might mean slapdash work by someone hustling to get a deal done. Or she could have asked that the price of the home be reduced. But that would have reduced her monthly responsibility only slightly, when amortized over the life of a mortgage.
Instead, she asked that the amount of the extra repairs be refunded to her as a credit at closing. “She saw a better immediate return by being able to keep that money in her pocket,” Centrella explained.
“It put her in a position where she can make more comfortable decisions” – that is, handling upgrades on her own, and doing them over time according to her own priorities. Of course, more money in her pocket also helps with the down payment, or closing or moving costs.
As Centrella points out, even in hot markets like D.C., it’s often in the seller’s best interest to try to reach a deal with a buyer who’s already in the picture, rather than scrapping the deal and going back to the market. “Time is money,” he said.
Despite the logic of the individual decisions, there is something a bit uncomfortable about the practice for some observers.
“During the boom, getting the sellers to subsidize the down payment was a common practice,” said Daren Blomquist, vice president of market economics at Auction.com. “In hindsight it was evidence that the buyers were financially stretched.”
Blomquist recognizes that there’s a big difference between the actions of a buyer trying to pile in to an inflating real estate bubble, and one who’s stretching to afford a home in a market badly in need of inventory. And he’s comforted by the fact that only about 15% of respondents to Freddie’s survey – a figure that’s been consistent for the past few years – said they relied on a seller subsidy.
Another key characteristic of today’s housing market is that the government agencies that set guidelines for mortgage lending have caps on how much a seller subsidy can add to the cost of the property. FHA loans can’t exceed 6%, for example.
Also important to note: mortgage underwriting rules are clear on the difference between what’s known as a “seller concession” – a credit at closing, that may increase the cost of the home, like Centrella’s client took – and a “seller contribution,” which is an amount deducted from the sale price. Contributions are used “almost never,” according to Tompkins.
(A spokesperson for Freddie Mac confirmed that understanding of the rules, and said that it’s likely that survey respondents may not be familiar enough with the nuances of “contribution” versus “concession” to correctly answer the question posed to them about their own experiences buying a home.)
Tompkins takes comfort in the idea that appraisers are a check on the agreed-upon price of a home sale with any credit baked in. “You very much are at the mercy of the appraisal and if it’s that far outside the realm of what similar properties have sold for, that’s an offer I will caution my sellers about taking,” Centrella said.
Still, as Blomquist said, “It protects the lender if the appraisal is done correctly, the lender will have a property that’s worth as much as they think it is, but you can’t depend on the appraisal to be a sign of whether a person can afford a property.”
Ultimately, he said, “It’s not wrong for a new homeowner to make some rational sacrifices to get into a home but we need to keep away from the end justifying the means when homeownership is the end and the means are any means possible.”