The five-year rule risk for first time homebuyers

Dear Monty: I am writing to tell you my story. Please share it in your column to warn others. I know how the Five-Year Rule works because I lost my entire down payment. When we bought our home about three years ago, no one we dealt with mentioned the Five-Year Rule. Our real estate agent, the mortgage loan officer, the appraiser, and the home inspector never noted it. We were there for over a year, and my wife and I divorced. I lived in the house alone before I decided to sell. It was on the market for months. Our agent (a different agent) initially told me the home was overpriced, but she did try. The bottom line is the house sold for what I paid. When they took the commission out, I had to bring a small check to the closing. Many other home buyers get trapped in this situation, so my question is, will you help?

Monty’s Answer: I’m sorry to hear this story, and I will publish your account. The five-year rule in real estate states that first-time homebuyers should generally live in a home for at least five years before selling the property. If they sell earlier, they risk losing all or part of their initial down payment. Your story demonstrates what can happen when someone violates the Five-Year Rule. Thank you for sharing.

Why are industry participants silent?

I don’t believe the vendors deliberately held this information back, and you didn’t imply they did. They have many other items to discuss and limited time spent with a customer. Many different reasons besides divorce could trigger the need to sell sooner. A warning mentioned at a happy time is a negative thought. If the vendors told customers of the existence of the Five-Year Rule, they would likely see it as a small risk and move ahead regardless.

Other events that could trigger the rule

This writer has seen couples struggling that felt buying a new home was the answer. It usually wasn’t. Other trigger events that happen every day are:

  • Disabling accidents.
  • Disease
  • Loss of job(s).
  • A job relocation.
  • The death of a family member.

So, considering the many events like these, being trapped is real. According to the American Rescue plan, the Homeowner Assistance Fund (HAF) has paid over 300,000 selling homeowners since inception, and the funding appears to be still available based on this Treasury Update in June 2023. State Housing Finance Agencies produced a map to learn if funds are available in your state. This $9.9 billion fund suggests that consumers unaware of the Five-Year Rule are at substantial risk.

Two options to avoid the consequences of the Five-Year Rule

  1. Buy below what size mortgage you qualify for and take a fifteen-year mortgage instead. You would build equity much faster to minimize loss if you had to sell. 30-year loans front-load the interest, so very little of the monthly payment goes to reduce the principal balance. Depending on market conditions when you sell, you may preserve much of your down payment.
  2. Buy directly from the owner when you buy, and sell directly to a buyer when you sell. When you do this, you avoid the Five-Year Rule altogether. This option assumes that home market values stayed the same from when someone purchased a home.