Are you SPOOKED Buying a House? HAUNTED by the 20% Downpayment? Not a GHOST of a Chance You Can Buy?
The recession not only took the homes of people who could no longer make their home payments, it erected barriers to homeownership by those seeking to move to another neighborhood, another part of the country, to remodel or upgrade their own home, or, to buy their first home.
The biggest barrier is the reliance on a 20% downpayment that insures buyers have enough "skin in the game" or enough financial backing to make them credit worthy. For a $100,00 home this means having $20,000 cash at settlement. In a high rent area of the country such as Washington, DC, San Fransisco or Boston a buyer might need $40-$60,000 cash. Not many of us have that kind of cash available.
Don't be spooked! Don't be haunted! Here are some treats which can reduce your downpayment and closing cost expenses helping you on your way to homeowership.
Take action now!
Don’t be a zombie!
1. High Credit Score. No tricks - only a treat! People with high credit scores receive lower interest rates. This is one treat totally within your discretion to achieve or change and maintain. A credit score of 700 is your target. You don’t have to earn big bucks to have a high credit score. Get a copy of your credit reports from Transunion,Experian and Equifax. You are entitled to a FREE credit report from each company once a year. Comb through them looking for anomalies. You may have incorrect data on your reports. You can have these corrected. If you have a problem, clean it up and repair it. A good credit score will open lender’s doors for you.
2. Reapply for a loan. If you were one of the folks caught in the recession in 2008 and you suffered a short sale or foreclosure … your required waiting period is up and you can re-apply for a loan. Welcome back to the mortgage market and your new home! A lovely treat! Waiting period for a short sale = 4 years. For a foreclosure = 7 years.
3. Federal Government Loans. No trick here! Consider a Federal Housing Administration (FHA) insured mortgage loan or Department of Veterans Affairs home loan guaranteed mortgage. Not all lending institutions offer FHA or VA loans. Not all sellers will want to deal with an FHA approved loan because it is more bureaucratic. But these loans are available and secure. Depending on the loan product you may have to pay PMI (See #7 below).
4. Do you have a 401(k)? Do you know that unlike an IRA or ROTH IRA you can borrow funds for a home purchase from this retirement fund with out penalty? You can borrow up to 50% of your 401(k) funds with a cap of $50,000. This is not a free treat! You do have to pay it back. You do pay interest although usually below standard financing institutions. It has to be repaid usually within 5 years with an extension for a home purchase. Plus … the time the money is not in your 401(k) means … it’s not earning money for your retirement. Check with a financial or tax advisor before pursuing this avenue to make sure it’s right for you!
5. Gifts. Super treat! Gifts from family members can be a key ingredient in your home purchase. Whether it’s $500 or $5,000 gifts of cash go a long way at settlement to reduce your costs. Be sure to have a well documented paper trail showing the money given to you is, indeed, a gift and not a loan.
6. Housing Authority Programs. Each state has a housing authority which receives funds from the Federal government to provide affordable housing programs. The programs may range from outright cash grants at settlement to below market financing to tax abatement. As always there are income and other qualifications such as first time homebuyer status. Check with your state or local housing department to find out what programs are available and for which ones you qualify.
7. Eliminate PMI - Use a Piggy-back Loan. Not quite as available now as before the 2008 crash, a piggy-back loan can eliminate PMI. What is PMI? Why would you want to eliminate it?
If you have less that 20% as a downpayment at closing you will be subject to Private Mortgage Insurance (PMI). This is a monthly fee on top of your mortgage payment that guarantees the mortgage holder that the loan will be paid should you default.
A piggy-back loan meets the 20% threshold by making two loans one piggy-backing on the other. First you receive a loan for 80% of your mortgage. A second loan made through an equity line of credit is then made for 10% of the mortgage. You make up the remaining 10% as the downpayment. Voilá! No PMI. (Note: in any event, on a conventional, off-the-shelf loan, once you get your mortgage at or below 80% of what you borrowed the PMI can be eliminated.)
Honestly ... this is not a trick! It's a well thought out treat that can help you stretch your dollars when securing financing for your home.
8. Cutting back. Yep. Good ol’ fashioned savings. Bringing your lunch to work can save up to $10.00 per day or $2,510 per year for a single person. That $5.00 cup of latte you buy at work every day? $1,255.00. Give up your car? Use the Zip car calculator (or other car sharing calculators) to find out how much you can save by not owning a car. It’s astounding! Are you willing to forego cable? Reduce eating out by one dinner a month? Reduce movie going by one per month? In one year you could save a huge amount towards your downpayment. Another free treat!
Of course, the downpayment is not the only costs you will incur at closing. Closing costs include transfer fees, title search, taxes, etc. You need cash to go to closing in addition to the down payment. When you apply for a loan for the home you are buying the financing institution is required to send you a "good faith estimate" of the closing costs. One day in advance of settlement, a required "HUD 1 Settlement Statement" will detail all the cash you will need to bring to the table at closing. You can compare these two documents and ask questions of the lender prior to closing.
With the exception of raising children, buying a home may be the single biggest financial commitment adults make in the course of their lives.
Don't go batty. Investigate these avenues to financing your home. Talk to others. Learn as much as you can before applying for a loan. Go for the TREATS not the TRICKS. You won't be a zombie!
30 Year Fixed Rate Projections
2015 = 4.5%
2016 = 5.3%
Mortgage Brokers Association
Cited in Mortgage News Vol. 16 Issue 10
Ann Zabaldo is a passionate promoter of cohousing. She was on the develoment team for Eastern Village in Silver Spring, MD and Takoma Village in Washington, DC where she lives. She serves on the Board for MAC.
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