Are you wasting thousands of dollars on rent and dreaming of becoming a homeowner? You can already make a monthly house payment (you're already paying rent), but the problem is coming up with money for a down payment. It's not as difficult as you might think. Here are ways to get a down payment with little out of your own pocket.
Look Into Local or Federal Government Programs. You may qualify for special government programs, such as those for first-time homebuyers and members of the military. You also may have access to aid from Fannie Mae and Freddie Mac (government-sponsored mortgage programs). Additional resources are non-profit and community groups and state agencies. There are too many programs to list here and they expire or change frequently. Your best option is to ask a REALTOR® to point out a few programs that apply to your area and situation.
Have the Seller Finance You. Some sellers may be willing to help you buy their homes. In a "seller take-back," the seller holds a second mortgage for you and becomes your lender. You would make your monthly mortgage payments to the seller.
Use A Tax Refund. There are options for you to borrow money for certain investments to a specific level and use those investments to generate a significant tax refund. Obviously, the timing has to be right to so you can use it as a down payment on a home.
Ask A Relative or Friend. Tax law allows gifts of up to $13,000 a year to be given without tax consequences to the giver or recipient. This gift-exclusion amount is adjusted annually to reflect inflation (see IRS publication 950 for the current amount). You can even get a gift from each of your parents or two friends without them having to pay a gift-tax, which bring it up to $26,000.
This is a great way to get a down payment for a home. In fact, one out of four first-time homebuyers use a gift to make the down payment. Even if this isn't your first home purchase you can still use a gift so you don't drain your savings. Usually lenders require you to have some money still left in your bank account after closing so they know you'll make the mortgage payment each month.
Also, using a gift for a down payment allows you to buy the home you want even if it's not FHA-approved. Some buyers are able to get Federal Housing Administration (FHA) mortgages that have down payments as low as 3.5% of the purchase price, but others will have to put more down. With a gift, you can put the typical 10% to 20% down that most lenders require. For example, if you had to put down 10% on a $150,000 home, that's $15,000. Or, 20% would be $30,000. A gift from relatives and friends can get you there but some of the rules differ depending on the lender you choose. Your best bet is to contact a well-connected REALTOR® before you start looking at homes.
It pays to do your homework! Your knowledge about home financing can mean the difference between making or losing tens of thousands of dollars. Here are seven strategies (I call them "secrets" because so many people disregard them when buying a home) you should consider when financing your home:
Secret #1: Clearly Understand How Much Home You Can Afford
Bankers and mortgage lenders use two guides to determine how much loan you can afford:
Payment-To-Income Ratio. This compares your income to the mortgage payment you're considering. The "payment" is the mortgage payment (principal interest) plus property taxes and insurance (PITI).
Debt-To-Income Ratio. This refers to all your major monthly financial obligations, including car and credit card payments and outstanding debts. Your lender will compare your total debt to your ability to make current payments with your new home loan added into the equation.
Here's the key: since each mortgage company sets different limits on your debt-to-income ratio, you need to find a lender who is motivated to loan you the money.
Secret #2: Be Financially Prepared - Ahead of Time!
Before you start looking for a home...
1. Find a MOTIVATED lender. Ask a REALTOR® to refer one or two reputable lenders to you. The lender will usually give you better service because they want to keep getting referrals.
2. Get pre-APPROVED not just pre-qualified. You'll have more power to negotiate the price and terms you want because sellers know you can close on the transaction.
3. Have deposit funds available immediately. Write a check to your broker or title company for 3 percent of the highest price you've been approved for with financing. A trustworthy REALTOR® can hold it un-cashed, so you can demonstrate that funds are ready and gain a competitive advantage if the seller gets multiple offers.
Secret #3: Understand The Basics of Home Financing.
Your ability to afford a home will be related to:
1. The price
2. Your down payment, and the amount you will finance
3. The interest rate and points of your loan
4. The term of your loan: 15-year, 30-year
5. The type of your loan. Fixed vs. variable rates are common but there are many loan packages to choose from.
To shop for the best financing, do your homework. Study each of these items and the relationship between them so you can understand what your mortgage lender is talking about. Knowing these specifics will help you choose the loan that will be the best deal for your situation.
Secret #4: Know The "Insider Secrets" Mortgage Lenders Use To Take Money Out Of YOUR Pocket!
Here's the secret: Many of the fees and costs are negotiable. And if they're not, you can certainly learn how to judge one loan program from another. Learn the lingo to spot negotiable fees:
Ø ORIGINATION FEE: what most mortgage companies charge to "originate" a loan. Traditionally, it's 1 percent of your total loan amount; if it's more, ask why.
Ø DISCOUNT POINTS: pre-paid interest amounts that can be used to buy down, or lower, your interest rate over the life of your loan.
Ø LOCK PERIOD: the period of time a quoted interest rate/discount point combination can be guaranteed. The shorter the lock, the lower the rates.
Ø JUNK FEES: small items such as document preparation, underwriting fees that lenders can mark up to generate extra profit.
Secret #5: Questions You MUST Ask A Mortgage Lender
When you meet with a lender, be prepared to ask questions. You have a right to this information and a lender will answer them without hesitation. Here are some examples:
1. Will I be charged an origination fee? If so, how much?
2. Will I be charged separate discount points? If so, how much?
3. Will I be charged any of these separate fees: processing, document preparation, underwriting, tax service or flood certification?
4. Will there be additional fees at closing?
5. Is there a Lock Period with this loan? If so, how long?
Secret #6: Work Out A Cost Comparison On Several Lenders To Locate The Perfect Loan!
Take time to evaluate one program against another. As you are evaluating, think about your long-term goals. How long do you think you'll own this home? Is your income going to change in the near term? What direction are interest rates going? When you talk to several lenders, you get a good picture of all the costs you'll have to pay to get the right home loan for you.
Secret #7: How To Save You Tens Of Thousands On Mortgage Interest
You can save thousands of dollars in interest by making one extra mortgage payment every year! Lenders frequently promote "Bi-Weekly" payment programs (which help minimize the interest you'll pay by increasing payment frequency) because they make money administering the program.
You can do THE SAME THING by making your own mortgage acceleration calculation. Take your monthly principal and interest payment and multiply that number by 13. Then divide that total by 12 to get your new "accelerated" monthly payment. This can make a world of difference in savings to you - and your ultimate net worth!