Real Estate and Life in Colorado and Beyond

Affordable Homes Where “Restrictions Apply” – Does Anyone Qualify?

When something seems too good to be true, it is probably is.  Untrue, that is.

And when a renovated, two-bed/two-bath foot townhome is listed for sale in a decent neighborhood, at a price below $250,000…Well, it raises hope, and then skepticism.

Particularly if you’ve been looking for an entry-level home in Denver, one of the five “least affordable” U.S. cities.  (A recent study ranked Denver worse than all other large urban areas except Miami and three cities on the West Coast.  The study considered prevailing income levels as well as home prices.)

The aforementioned 2BR townhome attracted the attention of my client, Teri Small.  She got interested in buying a home early this year when her landlord announced plans to terminate her lease.

We walked through the townhome on March 12.  It was nice, with an open floor plan joining a sunny living room with a half-walled kitchen, with granite counters and new vinyl plank flooring.  My client could definitely be happy there.

But the listing had been active for three months.  Listed on December 13, it had never even been under contract.  Why?

We knew the property was offered by Elevation Community Land Trust.  That’s one of a few local organizations that aim to make homes more affordable for Denver buyers.  ECLT offers near 100 percent financing on its homes, typically requiring just a $1,000 down payment.

The non-profit trust currently lists a few homes for sale, both at its own site and in the Multiple Listing Service used by real estate agents. Its financing qualification standards are very strict.  For an individual, the maximum allowable income is $55,950 annually.  For two people, it is $63,950.

The “front-end” debt-to-income ratio cap is 33 percent.  That is, the monthly housing payment can’t exceed 33 percent of the borrower’s monthly gross income.  That housing payment includes principal, interest, taxes, insurance, HOA fees, and a $100 monthly land lease fee paid to ECLT.

Suppose someone makes $50,000 per year, with no outstanding debt.  That’s $4,166 per month.  One third of that (33 percent) is $1,388 per month.  That amount must cover all the expenses above.  It translates to purchasing power of about $153,000 at today’s interest rates, using reasonable estimates for taxes and insurance.

The home we viewed is at 1811 S Quebec Way, Unit #152, Denver.  Then listed at $248,000, it has since been reduced to $233,000.  The listing has been active for five months.

Teri is employed by the City of Denver as a customer service rep.  She answers incoming calls to the city’s 311 information hotline.  Her income is approximately $40,000 per year.

With minimal number crunching, it was clear that the “affordable” townhome on Quebec was out of reach for my client.  Her income would not support the monthly payments needed to service a $248,000 loan.  Not even close.

But who could qualify?  What sort of buyer profile could satisfy the requirements?

Consider the best case.  Suppose a couple earns the max of $63,950.  (It can’t be a penny higher.)  Do the math, and their purchasing power is around $221,000.  Again, the Quebec Way property is now listed at $233,000.

And again, this is best case.  The hypothetical couple has good credit and no outstanding debt.  Yet they fail on the “front end” debt-to-income scale.  ECLT also enforces a “back end” DTI cap of 43 percent, which pertains to all debt including credit cards.

Is it no mystery that this listing, now five months old, is still active.  To me, it appears that no one qualifies.  Not even my hypothetical “best case” couple.  Not at today’s interest rates.

This is not to say that no one has ever qualified.  Since March, mortgage interest rates have increased from around 4.25 percent to around 5.5 percent.  If the debt-free couple had tried for the home in early March, they might gotten the green light, with the list price at $248,000 as it was.

But the potential buyer pool for these homes has always been small.  Recognizing that, ECLT cut the price of the Quebec townhome from $248,000 to $233,000 in April.  Which may have opened the window a crack for a few potential buyers.  But then the interest rates kept climbing.

My client Teri Small continued to shop for affordable homes.  We considered a home offered by Habitat for Humanity, a non-profit with an affordability mission similar to Elevation’s.   We declined to offer when we learned the qualification standards there were similarly strict, and ultimately prohibitive.

We did bid on a property listed by Denver’s own Housing Stability Homeownership Program.  A one-bedroom unit in the Stapleton area was priced at $162,658.  In this program, owners who list a property for sale are capped by a schedule dictating their maximum list price.

That home was open for showings for four days, Thursday through Sunday.  It attracted 18 offers, and we were not the winner.

Higher mortgage rates are the enemy of all debt-financed buyers.  Hardest hit are those at the very low end of the home price spectrum, where even a small shift in rates can push a borrower out of the qualified range.

Meanwhile my client Teri Small is still hoping, and shopping.  She is optimistic about the metroDPA Social Equity program, a recent Denver initiative offering up to $25,000 in grant assistance to certain qualified buyers.

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