Joseph D. Federico's Blog
Perhaps one of the most challenging things about buying a home is saving for the downpayment. Collecting such a large sum of money can be difficult. The truth is that most buyers actually think that they need more than they actually do to buy a home. The downpayment doesn’t need to be a barrier to your path to homeownership. There are so many programs that offer low and even no down payment home loans. Read on to learn more about down payments and programs that can help you.
First, let’s look at what a down payment is and how it can help you. If you put 10% down on a $200,000 home that’s $20,000. The downpayment minus the purchase price of the home is $180,000, and that's how much your home loan will be. The more money you can put down on the house, the lower your home loan will be and the lower your monthly mortgage payments will be. A large down payment can indeed save you in the long term. If you’re looking to move into a home sooner rather than later, saving a considerable sum isn’t always possible.
Low Downpayment Mortgages
You need to decide what type of home loan you need by the amount of downpayment you’re willing and able to put down. Some benefits go along with making a down payment, but there are some negatives.
By making a substantial down payment you may despite your savings, leaving little money for emergencies. Your mortgage rate may not be affected by a large downpayment either. It can be hard to decide what type of loan to get and just how much you really can afford.
FHA loans are among the most popular type of home loans. The downpayment that’s required is just 3.5%. The requirements are simple, and you don’t have to be a first-time homebuyer to qualify.
The drawback to an FHA loan is that you cannot cancel the monthly mortgage insurance that comes along with it unless you refinance the home. Traditional mortgage insurance is canceled when you have built up 20% equity in the house, but this isn’t the case with FHA loans.
Another positive about FHA loans is that your credit score doesn’t have to be stellar in order for you to qualify. Some lenders approve FHA loans with credit scores as low as 580.
VA Home Loans
Buyers who have current or former military service status can qualify for this zero down mortgage. These loans are benefits to veterans and current members of the Armed Forces. While no downpayment is required, buyers may put down any amount they wish. The only requirements are that buyers be members of the military either currently serving for 90 days or two years of active duty service if not an active member.
The above options are great for those who can’t afford or don’t wish to put down large down payments but still hope to be homeowners.
For those who want to acquire a house, it helps to get your finances in order. That way, you can quickly and effortlessly navigate the homebuying journey without having to worry about how you'll afford your dream house.
There are many quick, easy ways to straighten out your finances before you embark on the homebuying journey, such as:
1. Assess Your Credit Score
Your credit score ultimately can play a major role in your ability to secure a great mortgage. If you understand your credit score, you may be able to find ways to improve it prior to conducting a home search.
It is important to remember that you are entitled to a free copy of your credit report annually from each of the credit reporting agencies (Equifax, Experian and TransUnion). Request a free copy of your credit report today, and you can take the first step to evaluate your credit score.
If you find that your credit score is low, there is no need to worry. You can always pay off outstanding debt to improve your credit score over time.
Also, if you identify any errors on your credit report, you'll want to address these mistakes immediately. In this scenario, you should contact the agency that provided the report to ensure any necessary corrections can be made.
2. Look Closely at Your Monthly Expenses
When it comes to buying a house, it generally helps to have sufficient funds for a down payment. The down payment on a house may fall between 5 and 20 percent of a home's sale price, so you'll want to have enough money available to cover this total for your dream residence.
If you evaluate your monthly expenses, you may be able to find ways to save money for a down payment on a house.
For example, it may be beneficial to cut out cable TV for the time being and use the money that you save toward a home down payment. Or, if your dine out frequently, cooking at home may prove to be a substantial money-saver that could help you speed up the process of saving for a down payment.
3. Get Pre-Approved for a Mortgage
With pre-approval for a mortgage, you can enter the housing market with a budget in hand. Then, you'll be better equipped than ever before to narrow your search to houses that fall within your price range.
To get pre-approved for a mortgage, you'll want to meet with banks and credit unions. These financial institutions can teach you about different mortgage options and help you assess all of the options at your disposal.
Furthermore, don't hesitate to ask banks and credit unions about how different types of mortgages work. This will enable you to gain the insights that you need to make an informed decision about a mortgage based on your financial situation.
If you need extra help as you prepare to pursue a house, you may want to hire a real estate agent as well. In fact, a real estate agent can help you find a high-quality house at a budget-friendly price in no time at all.
Some mortgage companies offer loans with points. In a nutshell, paying points means paying down the interest rate. One point is equal to 1 percent of the mortgage amount. On a $200,000 mortgage, one point is $2,000. The percentage the interest rate lowers depends on the mortgage company and the market. For example, one point might be equal to a quarter of a percent interest. A loan with 4 percent interest and two points might go down to 3.5 percent interest.
Pros and Cons of Points
If you do pay points, you could get a tax break. Since tax laws are constantly changing, make sure you can claim points if part of your decision is based on the tax break. Other considerations include:
If your mortgage is an adjustable rate (ARM), some mortgage servicers only give you the discounted rate until the mortgage rate adjusts. Some may hold the discount rate over. For example, if you have an ARM that starts at 4 percent and you buy two points for a discount of ½ percent, you may lose that discount when the loan adjusts, especially if it changes to a higher interest rate. However, if the bank carries the discount over, the new rate might increase to 6 percent, but your one-half point discount would mean that your new rate would be 5.5 percent.
You need additional cash to buy points. If you plan on putting 20 percent down, but you want to purchase points and do not have more cash, you could be less than 20 percent down. However, compare the scenarios to determine which method is better in the long run. If you put less than 20 percent down, the mortgage servicer may charge you PMI, which would negate any savings.
You may save more by putting more down. If you put $40,000 down on a $200,000 mortgage, you are going to pay interest on $160,000. If you put less money down and buy points instead, your interest rate will drop, but you may end up paying more for the loan in the long run. Enter the numbers into a mortgage calculator to determine which way you save more.
If your mortgage is $200,000 and you put $40,000 down, thus cutting the amount you finance to $160,000, and do not buy points, the total interest you will pay over the length of the loan will be about $115,000.
Using the same scenario, you instead put $36,000 down and buy two points. This drops your interest rate to 3.5 percent from 4 percent. You will save about $16,700 over the life of the mortgage. And, you would have to stay in your house without refinancing for 49 months to break even on your savings. In this case, your $4,000 ends up saving you a net of $13,500 on interest (savings minus the $4,000 it cost you to save).
Before you agree to points or a larger down payment, discuss the scenarios with your accountant or tax attorney to determine which method is best for your situation. If you have to pay private mortgage insurance (PMI), buying points could end up costing you.
A month passes quickly, especially when you're faced with the responsibility of paying a five-figure or larger mortgage each month. Knowing that a $1,000 or more bill is coming in the mail, electronically or in print, could keep you up at night.
Paying a mortgage shouldn't leave you feeling anxious and worried
The only way to let go of all thoughts about paying a mortgage is to pay your entire mortgage off. That's not always easy if you just bought a house. With focus and action, there are things that you can do to release year round mortgage worries.
Giving yourself permission to accept how much financial responsibility you've taken on is a good first step. So too is remembering other times when you were concerned that you'd taken off more than you could chew only to find out that you had what it took to meet those demands. To stop worrying about your mortgage, you could also:
- Look at your other household expenses. Can you cut down on water, electricity or gas usage? Do you really need to take four or more outfits to the dry cleaners each week?
- Use money that you save from other household expenses to pay down the principal on your mortgage. Also, use a portion of the money to treat yourself to something that you love each week. It could be as simple as a new, ethnic meal. It could be as wonderful as a deep body massage.
- Listen to people when they tell you that you have a gift. Consider using your gift to advise and consult others, to generate additional income. Put 75% or more of the income that you earn from this work to pay off the principal on your mortgage.
- Take your bonus and overtime pay and start chipping away at your mortgage principal.
- Get serious about paying off credit cards, starting with credit cards that have the highest interest rates. Just paying off one high interest credit card could save you several hundred dollars a month. Invest this savings in your aim to pay your mortgage off early.
- Work up numbers on how much you would save if you refinanced your mortgage at lower interest rates.
A place to worry in is not what you bought your house for
At its core, a house should be a place to create great memories. It should be a place where you know, absolutely know, that you're free to express yourself without fear of ridicule or embarrassment. Step inside your house and you should let your hair down, not curl up on the sofa and start worrying about how you're going to pay next month's mortgage.
Start taking steps early to breakdown how you're going to pay your mortgage. Include how you'll pay your mortgage should unexpected events like job changes or layoffs occur. Be confident that you can continue to make changes, shifts in how you review and meet your financial responsibilities, until the task of paying your monthly mortgage no longer scares you.
As happens in any industry, there are professionals who work in the real estate industry who don't mind cutting corners. Protections against working with inexperienced realtors and mortgage brokers comes through local and state realtor licensing requirements.
You may not be real estate savvy, but you deserve to be heard
The realtor licensing requirements vary from state to state, but generally mandate that realtors complete educational training and pass a state approved licensing examination. Ethical and legal issues may be covered during the training. What training seminars, study guides and tests may not give realtors are strong communication skills.
A study guide may not show realtors how to respect mortgage borrowers and house hunters. This training may fall into your lap. To be effective when dealing with realtors and mortgage brokers, you need to be confident. When you are confident while house hunting, you can increase the likelihood that you will:
- Search for houses that fit within your financial range (confidence can help you to communicate to realtors the importance of not wasting your time and only showing you houses that are below your maximum budget)
- Avoid giving into realtor or mortgage broker requests to buy houses that have amenities that you don't really want or need
- Stick to looking for houses that are located in areas that match your personal tastes
- Get the chance to buy houses that your entire family will appreciate (this means that you won't be talked into buying a house that may be great for adults but injury provoking for children)
- Steer clear of attending open houses where former pet owners lived if you don't want to live in a house that was once home to several dogs or cats
- Receive a thorough explanation of each expense associated with owning a house. For example, if you're confident, you could clearly and respectfully communicate to a realtor that you want all costs associated with a house to be level with or below your budget. In this case, expenses like your mortgage principal and interests, homeowners association fees,closing costs, broker fees, title fees and loan fees and insurances will not exceed your maximum budget.
- Work with a realtor who takes the initiatives to update you on the status of the house shopping process.
House hunter confidence yields its own rewards
Reliable and respectable realtors and mortgage brokers are honest. They value house hunters and borrowers, whether these adults are their clients or not. They research directories, conduct smart marketing for their clients and look for quality houses that match their clients' requests. Sharp realtors and mortgage brokers aren't pushy or demanding. They listen to their clients.
If they exhibit enough respect and self-confidence, smart house hunters could help to sharpen realtors and increase their chances of working with realtors who find them houses that they will afford and appreciate. They could also help realtors gain the very skills that strengthen and lengthen realtor careers, skills like active listening, focused question asking, thorough research and welcomed communication skills.