One of the biggest misconceptions of home buying? The 20% down payment. Here’s how to buy with a lot less down.
Buying your first home conjures up all kinds of warm and fuzzy emotions: pride, joy, contentment. But before you get to the good stuff, you’ve got to cobble together a down payment, a daunting sum if you follow the textbook advice to squirrel away 20% of a home’s cost.
Here are five creative ways to build your down-payment nest egg faster than you may have ever imagined.
1. Crowdsource Your Dream Home
You may have heard of people using sites like Kickstarter to fund creative projects like short films and concert tours. Well, who says you can’t crowdsource your first home? Forget the traditional registry, the fine china, and the 16-speed blender. Use sites like Feather the Nest and Hatch My House to raise your down payment. Hatch My House says it’s helped Americans raise more than $2 million for down payments.
2. Ask the Seller to Help (Really!)
When sellers want to a get a deal done quickly, they might be willing to assist buyers with the closing costs. Fewer closing costs = more money you can apply toward your deposit.
“They’re called seller concessions,” says Ray Rodriguez, regional mortgage sales manager for the New York metro area at TD Bank. Talk with your real estate agent. She might help you negotiate for something like 2% of the overall sales price in concessions to help with the closing costs.
There are limits on concessions depending on the type of mortgage you get. For FHA mortgages, the cap is 6% of the sale price. For Fannie Mae-guaranteed loans, the caps vary between 3% and 9%, depending on the ratio between how much you put down and the amount you finance. Individual banks have varying caps on concessions.
No matter where they net out, concessions must be part of the purchase contract.
3. Look into Government Options
The U.S. Department of Housing and Urban Development, or HUD, offers a number of homeownership programs, including assistance with down payment and closing costs. These are typically available for people who meet particular income or location requirements. HUD has a list of links by state that direct you to the appropriate page for information about your state.
HUD offers help based on profession as well. If you’re a law enforcement officer, firefighter, teacher, or EMT, you may be eligible under its Good Neighbor Next Door Sales Program for a 50% discount on a house’s HUD-appraised value in “revitalization areas.” Those areas are designated by Congress for homeownership opportunities. And if you qualify for an FHA-insured mortgage under this program, the down payment is only $100; you can even finance the closing costs.
For veterans, the VA will guarantee part of a home loan through commercial lenders. Often, there’s no down payment or private mortgage insurance required, and the program helps borrowers secure a competitive interest rate.
Some cities also offer homeownership help. “The city of Hartford has the HouseHartford Program that gives down payment assistance and closing cost assistance,” says Matthew Carbray, a certified financial planner with Ridgeline Financial Partners and Carbray Staunton Financial Planners in Avon, Conn. The program partners with lenders, real estate attorneys, and homebuyer counseling agencies and has helped 1,200 low-income families.
4. Check with Your Employer
Employer Assisted Housing (EAH) programs help connect low- to moderate-income workers with down payment assistance through their employer. In Pennsylvania, if you work for a participating EAH employer, you can apply for a loan of up to $8,000 for down payment and closing cost assistance. The loan is interest-free and borrowers have 10 years to pay it back.
Washington University in St. Louis offers forgivable loans to qualified employees who want to purchase housing in specific city neighborhoods. University employees receive the lesser of 5% of the purchase price or $6,000 toward down payment or closing costs.
Ask the human resources or benefits personnel at your employer if the company is part of an EAH program.
5. Take Advantage of Special Lender Programs
Finally, many lenders offer programs to help people buy a home with a small down payment. “I would say that the biggest misconception [of homebuying] is that you need 20% for the down payment of a house,” says Rodriguez. “There are a lot of programs out there that need a total of 3% or 3.5% down.”
FHA mortgages, for example, can require as little as 3.5%. But bear in mind that there are both upfront and monthly mortgage insurance payments. “The mortgage insurance could add another $300 to your monthly mortgage payment,” Rodriguez says.
Some lender programs go even further. TD Bank, for example, offers a 3% down payment with no mortgage insurance program, and other banks may have similar offerings. “Check with your regional bank,” Rodriguez says. “Maybe they have their own first-time buyer program.”
Not so daunting after all, is it? There’s actually a lot of help available to many first-time buyers who want to achieve their homeownership dreams. All you need to do is a little research — and start peeking at those home listings!
A SHARED ARTICLE WRITTEN BY MICHELE LERNER
In an environment where lenders are highly regulated and risk-averse, borrowers are rightfully a little nervous when they apply for a mortgage. But with the right preparation, qualifying for a home loan can be a rewarding experience in your journey toward homeownership.
“In a lot of ways, lenders have gone back to the basics, looking at fundamental personal finance criteria to decide who qualifies for a loan,” says Rick Sharga, chief marketing officer of Ten-X, an online real estate marketplace in Irvine, California.
At the same time, Sharga says lenders have been more risk-averse than ever since the housing bust.
A.W. Pickel, III, Midwest division president of AmCap Mortgage in Kansas City, Missouri, recommends finding a loan officer you can trust and sticking with that person during your entire homebuying process.
“A good loan officer is like a pilot flying you and your loan from Kansas City to Hawaii,” Pickel says. “There are several ways to get there and several things that can happen on the way. A good loan officer has seen the turbulence and knows where the smooth air is.”
7 steps toward a loan approval
The back-to-basics approach by lenders means that borrowers can take steps that increase their chances of a mortgage approval.
Improving your credit, reducing your debt and gathering your documentation are among the many things you can do long before a loan application to increase the likelihood of getting a “yes” from a lender.
1. Maintain a high credit score. The average FICO score for an approved borrower is around 720 for a conventional loan and close to 700 for an FHA-insured loan, says Sharga. He says borrowers should find out their FICO score before applying for a loan, make sure their credit report is correct and take steps to improve their score if necessary. Pickel says he recently reviewed a loan file with a high debt-to-income ratio of 49 percent but a credit score over 800, which resulted in a loan approval.
Keep a vigilant eye on your credit profile while you wait for your loan to close, too.
“Once the application process has begun, borrowers shouldn’t do anything that might negatively impact their credit rating — no new accounts, no late or missed payments,” says Sharga.
2. Save for a bigger down payment. One way to minimize risk for a lender is to make a higher-than-minimum down payment. “The average down payment today is around 10 percent; historically the standard has been 20 percent,” says Sharga. “Anything above that lowers the loan-to-value ratio, which is viewed positively.”
3. Choose the right loan. If you have less money for a down payment but have good credit, you may qualify for a conventional loan with private mortgage insurance and a down payment requirement of 3 to 5 percent.
You may want to look for a lender who issues FHA loans, which are often available to borrowers with less cash or a lower credit score and require a down payment of 3.5 percent. Keep in mind these loans require a monthly mortgage insurance payment in addition to principal and interest, Sharga says.
4. Manage your debt. Lenders are reluctant to issue loans that fall outside qualified mortgage rules established by the Consumer Finance Protection Bureau (CFPB), says Sharga. These loans have a strict cap of a 43 percent debt-to-income ratio, which is the percentage of your gross monthly income that goes toward the minimum payment on all your debt, including your mortgage.
Paying off credit card balances or at least reducing debt before applying for a home loan is helpful.
5. Buy within your means. “Be realistic with your monthly income,” Pickel says. “Buy a house with a monthly payment you can afford. Buying a house that needs the income from two or three future raises will only cause stress.”
It matters that you can afford your payments and have remaining income after those payments are made, he says.
6. Demonstrate stability. Lenders look for signs of personal and financial stability, such as whether you’ve saved three to six months’ worth of expenses in the bank, whether you have a steady employment record and how often you’ve moved over the past few years, Sharga says. Your good credit score and a pattern of saving money are both indicators of financial strength.
7. Respond fast to lender requests. The CFPB’s ability-to-repay rule requires lenders to verify whether a borrower has the means to handle loan payments, says Sharga. This requires you to have all your financial records in order, including pay stubs, bank records, tax returns and more. Sharga says incomplete documentation is a common reason for loans being declined.
“If the loan officer asks for it, then bring it,” says Pickel. “Sometimes people don’t want to say they can’t find something or they don’t want to look for it, but it really helps to have all the information that the loan officer requests. This will help expedite the process.”
While it should go without saying, honesty is an essential component of a loan approval.
“No one likes surprises, especially loan underwriters,” says Pickel. “Tell the truth, even if it hurts. It will help even if it means that you don’t qualify today.”
Michele Lerner has been writing about real estate, personal finance and business topics for more than two decades and contributes articles about mortgages at MoneyGeek.com. Her work has appeared in The Washington Post and online at Fox Business News, Forbes BrandVoices, NewHomeSource.com, MSN.com, and Yahoo.com.
If you are renting now you are very familiar with the high cost of rental rates in this sizzling real estate market. This article will help with laying the ground work for qualifying for a mortgage to purchasing your own home plus the mortgage payment will most likely be less than what you are paying in rent right now.
Housing Statistics for Longmont Colorado —
Week of 2/25 to 3/4
# of Homes Newly Listed for Sale this week- 40
# of Homes that have gone Under Contract this week- 33 (average of 46 days to offer)
# of Homes that Sold this week- 36 (average of 76 days to sale)
The local market here in Longmont is VERY active. The buyers that I am showing homes to right now are all experiencing the same situation: they see a few homes online that they identify to go see, in a matter of days (sometimes even hours) the list of homes shrinks to a fraction of what it was because the homes are all under contract. Sellers are receiving offers faster than Buyers can schedule showings!
It takes an experienced, aggressive, and available agent to make sure that you secure the home you want. Call me if I can help you.
Garry and Lisa in the Longmont Newspaper!
Continued historically low interest rates and five-year lows in inventory are the highlights of the Longmont-area housing market heading into 2013.
Following the bottom falling out of the market in late 2008, it has been a long, slow climb back up for the real estate industry. The so-called Great Recession and the economic upheaval that went along with it have made for a bumpy ride the past several years.
But in 2012, things seemed to return to normal, with the federal government’s incentives and the worst of the foreclosure situation having run their course.
Single-family home sales picked up in the St. Vrain Valley in 2012. Total homes sold in Longmont were 1,082, a 21 percent increase over the 892 sold in
2011. The average days on market dropped 16 percent, to 88 from 105 in 2011, and the median sale price was up nearly 12 percent: to $230,000 in2012 from $206,000 in 2011.
But the number of active listings — 280 in Longmont at the end of 2012, compared with 309 at the end of 2011, according to Kyle Snyder of Land Title Guarantee Co., who compiles monthly stats for the Longmont Association of Realtors — is at a five-year low, meaning buyers’ choices are limited.
“I haven’t seen a lot I’ve liked, but I like this,” prospective homebuyer Barbara McCormick said as she toured a house in the Yeager Farms neighborhood last week.
Her real estate agent, Dene Yarwood of Wright Kingdom Real Estate, reported the next day that McCormick had decided to buy the four-bedroom, three-bath house.
Yarwood, a broker/associate with Wright Kingdom and 2013 president of the LAR’s board of directors, said the Longmont real estate market really started ramping up last spring.
“It’s still such a great time to buy,” Yarwood said. “Interest rates are still so, so low. And prices haven’t climbed as much as we’d like them to yet.”
She said the normal laws of supply and demand don’t necessarily apply in the market right now. Given how low inventory is, it would seem prices should be up significantly, but they are, in fact, lagging, Yarwood said.
“I think it’s because of the issue that we had with appraisals before 2008 that put us in this position to begin with,” she said. “In 2008, we were too free with our pricing, and right now we are being too conservative. If we can find something in the middle, it will help both buyer and seller.”
While there is building going on — at Yeager Farms, for example — the homebuilding industry is still recovering from the complete stop of just a few years ago, Yarwood said.
“Suddenly after our market changed last March, it took a little while to get it going again,” she said. “There is some construction going on, but I think now they’re kind of playing catch-up.”
Lisa Henry, a broker/associate with Legacy Real Estate Group, said the market now is almost a complete reversal of the way things were about seven years ago.
“Then, we had more listings than we had buyers,” Henry said. “Now, we have more buyers than listings.”
For example, she said, in Longmont, the largest number of houses sold are always in the $175,000 to $250,000 range. At the moment, Henry said last week, there are 40 of them on the market, “and of those properties, 19 are under contract.”
Once you factor in specifics such as location and layout of a particular house, the field of choices for the buyer is narrowed even further, she said.
the plus side, for the buyers, “they can buy more house for the same (monthly) payment than they did 10 years ago,” Henry said.
On the seller end of things, the low inventory doesn’t automatically mean people can simply hand out a for-sale sign and fetch what they’re asking, according to Yarwood.
“I think you still have to present a good product to attract buyers,” she said. “And while we’re not back to pre-2008 pricing, we’re inching up, and that’s a good note for sellers.”
Josh Hunter, the owner/broker of Metro Brokers/St. Vrain Realty, said he’s noticing buyers are most interested in “the shiny one on the shelf” — referring to how clean a home is, how move-in ready it is and what kind of improvements have been made, such as with kitchen appliances.
“Those are where we’re seeing 10 days — we’re seeing low days to an offer,” Hunter said. “Luckily, I was in four or five of those deals (last) year, where we were seeing multiple offers in just a few days.
“Those well-cared-for, ready-to-move-in homes, no joke, should be receiving an offer within 30 days,” Hunter said. “I’ve been telling people: location, location, condition.”
In the last week, my office has put three new listings on the market, all three have received multiple offers within the first few days on the market!
$179,900 in Thornton – 2 offers in first 5 days
$224,500 in Longmont – 2 offers in first 3 days
$289,000 in Firestone – 3 offers in first 4 days
We Need More Listings!!
The local Northern Colorado / Denver Metro housing market is experiencing a serious shift towards the Seller’s advantage. Forget about everything you’ve heard before, and find out if this is finally your year to move, successfully.
“Garry was as dedicated as I was toward resolving whatever issues came up. He made my problems his own and worked with me until they were resolved. I experience this attitude/ethic very rarely and am always thankful to see that it’s still out there. His availability and consistency in problem solving went far in reducing the stress that I was under. I never had a doubt regarding any aspect of his performance. Without exception, every task they undertook, whether at my request or their volunteering, was carried out promptly and properly.”
Boulder, July 2012
“Garry listened to what I wanted in a house and didn’t try to push me towards a specific thing that he “thought” I would like or try to push me higher then I wanted to go price wise. He worked very hard to help me find exactly the house I was looking for at a price I was comfortable with.”
Longmont, March 2012
“Professionalism was always applied, whether it was in person, on the phone, in a message left or an email sent. The information provided regarding properties we were interested in was beyond that which was expected and sincerely appreciated.”
Thornton, April 2012
“Garry was very professional and helpful. He also marketed the house very well-we feel it’s one of the reasons it sold so quickly.”
Longmont, May 2012
Below are the residential statistics for Boulder, Broomfield, Longmont and the surrounding areas.
Click here for the January Stats in PDF format
This article echos what I’ve been experiencing as well… there just aren’t enough homes for sale. Low inventory is good for Sellers, and 30 year fixed interest rates at 3.75% is just unbelievable for Buyers.