The down payment. It’s the only thing keeping you from a home of your own. You’ve got a good job, you’re paying down debt, and mortgage rates are still remarkably low. And rental rates are getting ridiculous.
Let’s see if we can break down this home buying barrier.
If you’re a first-time home buyer, the down payment hurdle you have to clear may be quite a bit lower than you think. Traditionally, lenders have preferred 20% down, but a lot of low down payment options are available, especially to first-time buyers.
Mortgages guaranteed by the Federal Housing Administration, Department of Veterans Affairs or Department of Agriculture can be go-to low down payment loans. In fact, mortgages backed by the VA and the USDA — for those who qualify — usually don’t require a down payment at all. A funding fee is charged on VA loans, but even that can be rolled into your monthly loan payment.
You could get an FHA-backed loan with as little as 3.5% down, but you’d have to pay mortgage insurance to help lenders defray the costs of loans that default.
VA loans are available to members of the U.S. military and veterans of the Armed Services.
These mortgages provide a 100% financing option, and VA mortgage rates are often lower than those of other programs.
Rural Housing or USDA loans also allow 100% financing. The program is available for homes in rural areas and less-dense suburban neighborhoods nationwide.
USDA mortgage rates are often as low as VA mortgage rates.
Conventional loans, which aren’t backed by the government, also offer low down payment programs to first-time buyers. Down payments of just 3% are common. Some lenders will offer 0% down loans. Mortgage insurance will enter the picture here, too.
However, a lower down payment usually means you’ll pay a higher interest rate.
First-time home buyers often cite “making a down payment” as a primary obstacle to homeownership.
However, in addition to an abundance of low- and no-down-payment mortgages, first-time buyers have access to down payment assistance programs (DPAs) — many of which “grant” money instead of requiring repayment.
And the programs are widely available, too.
According to a study from housing data company RealtyTrac, there are 78 million single-family homes in the United States, including condominiums. 68 million — or 87% — of these homes potentially qualify for assistance.
As a first-time buyer, therefore, you can use assistance programs to help reduce your cash required at closing; and, to reduce your monthly mortgage payment.
Strangely, less than ten percent of home buyers even apply for down payment assistance.
Home buyers often don’t apply for such programs because they’re unaware that the down payment assistance programs exist, they don’t believe they’ll qualify, or they plain don’t know where to get access.
To find out for which assistance programs you may be eligible, talk to your mortgage lender. Most banks have applications on-hand for down payment assistance programs, or can point you to a website.
The average assistance amounts to $11,565.
Getting help from family members might be another way to go.
Garrett Clayton, CEO of AmCap Mortgage in Houston, cautions that receiving a gift toward a down payment takes a “full circle” of documentation to satisfy a mortgage lender’s requirements. The donors will have to verify in writing not only that they made the gift but that they have the financial ability to make such a donation. That will require them to provide bank statements as proof, along with a letter confirming that the donation is a gift and not a loan.
“From a lender perspective, if it is something that will be required to be paid back, then we would need to take those terms of repayment into the calculation of the borrower’s [debt-to-income] ratio, to make sure they still qualify,” Clayton says.
However, while properly documented gifts are acceptable to lenders, you might not want to rely exclusively on the kindness of family members, he adds.
“We see that borrowers that have none of their own money in the transaction are way more likely to default on loans,” Clayton says. “I would much rather do a loan to a 600 FICO client that has 100% of their own down payment, versus a 780 client that is getting 100% [of their down payment as a] gift.”
Closing costs typically include fees for commissions, appraisals, and surveying; inspections and certifications; tax and title services, government record changes, and transfer taxes. You’ll also pay an origination fee to your mortgage lender, and a charge for specific interest rates.
Other factors can also come into play. In a major city co-op, you may be required to have a year or more of maintenance fees in the bank. And finally, remember that the tail end of every home buyers’ experience is the move — meaning even more bills.
First-time home-buyers are sometimes surprised when they see how closing costs can add up. The average amount is 3% to 6% of the price of the home. Given that range, it’s a wise idea to start with 2%-2.5% of the total cost of the house, in savings, to account for closing costs. Thus our $300,000 first-time home buyer should sock away about $6,000-$7,500 to cover the back end of their buying experience. Tallying the recommended savings so far, the amount comes to $36,000-$37,500.
To get personalized advice for your unique situation, call the top real estate agent in Lincoln, Mitzi De La Cruz! You can call her directly at (916) 871-8132!