The recession caused many Americans to rethink whether homeownership truly is the American dream, yet a fair number of them still prefer owning to renting. In fact, a 2013 survey commissioned by the MacArthur Foundation found that more than 7 in 10 renters hope to own someday. But with stagnant wages for the past several years, Americans wishing to buy a home sometimes have to get creative.
Here’s a look at several ways they’re doing just that.
Co-buying. Multigenerational homes are becoming more mainstream. In fact, a Pew Research report found that 57 million Americans (about 18 percent of the population) lived in multigenerational households in 2012, compared to 28 million in 1980. The trend makes sense for both older and younger generations, says Charlie Young, president and CEO of ERA Real Estate based in Madison, New Jersey. “We’re getting a baby boomer generation that is aging and wanting to downsize,” he says. Meanwhile, millennials “might not have saved quite enough because we’re post-Recession, and [they] might have college debt weighing on [them],” he explains.
In some cases, parents might buy the property and charge rent to their children, or in other cases, all adult occupants might be on the mortgage together if they had good credit or needed the income to qualify for the loan. When there are several borrowers, lenders use the credit score of the borrower with the lowest credit, says Bob Collins, a mortgage broker at Signal Hill Mortgage in California. And arrangements involving several buyers are not uncommon, he adds.
Interestingly, though, it’s not just parents and adult children who join forces to buy a home. Friends or siblings might enter into a co-buying arrangement. Marti Cook, a Redfin agent in Fresno, California, says she’s working with a pair of sisters who plan to buy a home jointly. “Instead of both of them living in separate areas, they’ll buy one home together that has two master suites, and as they age, they’ll have each other to rely on,” she says. A layout with two master suites might be hard to find in older, existing homes, but she says builders are now responding to demand for more flexible living arrangements such as two master suites or an in-law suite.
Moving to a cheaper region. Certain hot real estate markets may be out-of-reach for most Americans. For instance, Zillow reports that the median home value at the end of last year topped $1 million in San Francisco and Manhattan. Communities in Western states such as Texas, Arizona and Utah are seeing huge growth, thanks in part to lower housing prices. Cook says she’s also seeing growing interest in Fresno as an alternative to higher cost cities like San Francisco and Los Angeles, which have median prices more than double the cost in Fresno. “People in those areas who are able to telecommute or work remotely are saying, ‘It’s time to buy a home in the Fresno market,'” she says.
Of course, choosing a neighborhood based on price alone isn’t smart. “Make sure you get a really good reading of the area,” Cook says. “Know the neighborhood, the schools and find out as much as you can about the growth potential, crime rates and industries in the area. You want to know what you’re getting into.” She says a good agent can help you and your family find the right area based on everyone’s interests. “If they’re really involved with certain types of activities — maybe they own horses — that makes a difference,” she says. “I try to learn about clients and their lifestyles.”
Down payment assistance. Federal Housing Administration loans allow buyers to qualify for a mortgage with as little as 3.5 percent down, and Freddie Mac and Fannie Mae recently launched their own low-down payment programs. For those determined to buy in a pricey market that might require a jumbo loan not available from Freddie, Fannie or FHA, options like the REX HomeBuyer program can help. REX is not a mortgage lender, but it offers down payment assistance in exchange for an equity share of the home’s appreciated or depreciated value when sold (special provisions apply if a home is sold within three years before the property has had time to appreciate). Buyers must come up with at least half the down payment themselves, but gifted down payments can be used in some cases.
Rob Spinosa, a Mill Valley, California-based mortgage loan originator with RPM Mortgage, says programs like REX can make sense for people buying in markets like the Bay Area who need a large down payment to keep monthly payments within their reach, or qualify for a certain size mortgage. “With home prices being high, coming up with a 20 percent down payment can be a challenge even for people who’ve saved,” he says. “By partnering with REX, you’re cutting down your investment initially. You’re not borrowing 90 percent, you’re only borrowing 80 percent.”
Having a down payment larger than 20 percent also avoids the cost of private mortgage insurance, but borrowers still need to demonstrate adequate credit and income to borrow the remaining 80 percent. The trade-off is that while REX might provide a 10 percent down payment to match your 10 percent, it will share a larger portion of the appreciated value when you sell the property or buy out of the program. As Spinosa explains, “They’re paying back the agreement with future appreciation, not with debt service.”