I. Builder Offers 2.99% – Don’t Walk, RUN!
Below-market interest rates cost money – always. And WAY-below-market interest rates cost a lot of money – always.
So, when a builder offers 2.99% fixed-rate financing (like we recently saw in TX), buyers should be leery, at best.
There is no magic supply of very low rates that builders can tap into by luck; builders must pay for those rates – usually via “forward commitments.”
This article explains how they work, but suffice it to say that builders have to pay for lower rates, similar to the way borrowers do.
And a 2.99% rate could easily cost a builder 20 points in today’s market.
The builder offering 2.99% is selling homes for $325,000 to $425,000.
So, if a buyer is getting a $350,000 mortgage at 2.99%, the builder likely paid as much as $70,000 for that rate.
If I were a buyer, I’d much rather have a $70,000 discount off the sales price than the artificially low rate that I may not keep for more than a few years (if I sell or refinance – which buyers often do much sooner than they expect).
Builders love offering below-market rates for three reasons:
- The low rates definitely entice buyers.
- Offering low rates instead of discounted home prices keeps the development’s home prices propped up (and previous buyers happier).
- As the article I linked to above explains, offering below-market rates is often much cheaper than offering price discounts.
II. Gift Funds For Investment Properties: A Bigger Deal Than You Might Think (DSCR GETS EVEN BETTER)
Since the 2008 meltdown, Fannie Mae and Freddie Mac have offered the most competitive financing options for investment properties/rentals.
But that is coming to an end thanks to Debt Service Coverage Ratio (DSCR) financing – which allows buyers to qualify with future rental income only (no tax returns or income documents required).
A. Much easier: DSCR financing is much easier to obtain because it does not require income documentation.
B. Lower rates: DSCR rates, for strong, cash-flowing properties, are now often lower than Fannie/Freddie rates.
C. GIFT FUNDS ARE ALLOWED: Fannie and Freddie do not allow gift funds for investment property financing. But one of our DSCR investors does.
This is a big deal because we often have investment property buyers who are short cash to close. It also helps young investors to get into the market much more easily.
