Q: I’m a first-time homebuyer and I don’t have money for a down payment of $8,000. I have only $2,000. (I pay $1,570 for rent right now.) Prices are so low right now that I really would love to buy a house. How can I get into a house without putting so much down for the closing costs?
A: There are certainly strategies for finding money to bolster your down payment and accelerate your ability to buy a home, and we’ll get there in a minute. First, though, I want to caution you about rushing into homeownership while your finances might be immature for the responsibility. Smart ownership involves making sure you have enough funds not just to close the deal, but to cover the true costs of owning and maintaining your home over the long term.
You are correct — this is an incredible buyer’s market, and the window of opportunity for taking advantage of it is slowly closing. However, if I’ve said it once, I’ve said it a million times — it’s only a good time to buy a home if and when it makes sense for your life to buy. Don’t let the market drive your decisions whether and when to buy a home; rather, use the market to guide the strategies you use for executing those decisions, once you make them (e.g., how much to offer, how much to put down, what sort of mortgage to take, etc.).
My advice has been that it’s a great time to buy for people whose families, lives, finances and life plans are in a state of readiness to buy. But if all these ducks are not in a row, rushing to buy to try to get a good deal is foolhardy at best, and a setup for failure at worst.
In most markets, there will be deals to be had for months or even years to come. Even if you have to buy after the market has bottomed out, you’ll still likely save money compared to buying a home in 2005 or 2006. Don’t let the fear of missing the market drive you into a premature decision to buy.
In your question, I detect some confusion between down payment and closing costs. Your down payment is the difference between the purchase price of your home and the amount of your home mortgage — currently, the lowest down payment required by virtually any reputable lender is the 3.5 percent minimum down. Closing costs are a separate issue; doing a real estate transaction costs money separate and apart from your down payment. As a homebuyer, you will incur costs for your inspections, escrow, title insurance, and maybe even city and state transfer taxes, depending on your jurisdiction. Closing costs, at entry-level price ranges, can vary from about 2 to 5 percent of the purchase price — above and beyond the down payment your lender requires you to bring in.
Now, these days, you can often ask the seller to incorporate your closing costs into the sale price, so that you don’t have to come up with those funds out of your own pocket at closing. But your down-payment funds are another story — in fact, unless you have a family member who is willing to simply give you 3.5 percent of the purchase price of your home for a down payment, you will almost certainly need to bring in that minimum down payment from your own pocket. I’m not sure what home values are like in your area, but assuming a $150,000 purchase price, the 3.5 percent down payment on an FHA loan would be $5,250 — that’s the bare minimum amount of cash you would want to have on hand to do that sort of deal. …CONTINUED
Now, your city or state might have down-payment assistance programs available; often these are designated to help first-time homebuyers (i.e., people who have not owned a home within the state in the last three years). These programs vary widely; some offer small down-payment grants or second mortgages, while others can offer a significant amount of money to boost your purchasing power. However, note that most of these programs require that 3 percent or more of the purchase price be put into the transaction by you, the buyer, out of your own funds. As such, I stand by my recommendation that you try to save a minimum of 3.5 percent of your target purchase price before you begin a serious house hunt.
1. Find a Realtor and/or mortgage broker by asking people in your circle for referrals. Get them on the phone and tell them what you’re wanting to do, then ask them to help you create a credit and savings action plan — with timelines, action steps and deadlines — to facilitate your path to homeownership.
2. Ask these professionals what down-payment assistance programs are available in your area and also research them on the Web. Incorporate the programs you might be eligible for into your action plan, understanding that programs and the funds they have available change constantly, so that you can’t count on any given program being available by the time you’re ready.
3. Some serious financial planning is in order. Owning a home has costs above and beyond the mortgage. Property taxes, insurance, and even water and garbage utility bills are things you haven’t had to deal with as a renter; when you own a home, though, even if your monthly mortgage payment was the same as your current rent, your true costs of ownership would likely be several hundred dollars a month higher than that. And when you own a home, it behooves you to be prepared to deal with home repairs and ongoing maintenance as well, although you can minimize the risk of big surprise costs by having thorough property inspections during escrow and by obtaining and maintaining a home warranty plan for your home.
If you really want to get ready to be a homeowner, you might want to find a cheaper place to rent, pay down your bills, and/or increase your income and your savings to position yourself for success.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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