Down Payment Assistance
Many local and state agencies run bond programs to generate funds to help individuals and families with a down payment. Contrary to public thinking, these bond issues are not a type of welfare. The government knows that it can be tough to buy that first home, especially on a limited income.
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Most agencies are income sensitive, but you may be surprised by the high level of acceptable income. The income level is especially high if you have children or dependents. Most agencies also have purchase limits, but they are adjusted to the income qualifications level.
If you are able to obtain down payment assistance, you may receive a lower interest rate. The drawback is that it often takes quite a bit of work with extra paperwork and mandatory education classes. Our advice, find a Realtor or mortgage professional who is familiar with both the local and state agencies and their policies.
Down Payment Loans and Gifts
Loans and gifts can help with your down payment but you can not use this strategy for all loan programs. The most popular program for this tactic is the Federal Housing Administration or FHA. Loans and gifts can help with your down payment but you can not use this strategy for all loan programs. The most popular program for this tactic is the Federal Housing Administration or FHA. FHA allows 100% gift funds for your down payment. The gift can be from any relative or can be collected through new innovative programs, like the Bridal Registry where couples receive money into an account that can be used for the down payment.
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Another popular tactic, which can be used in a wider range of programs, is to borrow from your 401K program. If you have a 401K program with your employer, you can withdraw without a penalty for your down payment and pay it back over a specified period. There are some drawbacks, the payment will be used in qualifying and your 401K account will not continue to grow as fast. Even with these drawbacks, it is often a smart move if this is your only option.
Down Payment Grants That Are Never Repaid By the Home buyer
There are national non-profit organizations dedicated to assisting home buyers with their down payment and closing costs. There are national non-profit organizations dedicated to assisting home buyers with their down payment and closing costs. Buyers can receive a free gift under these programs. Gift amounts vary with each program but are generally available in amounts of 3% with some programs, all the way up to $22,500 with others. Buyers never have to repay these gifts.
It's easy to receive a free gift from these programs, however qualification guidelines do vary with each program. Each program requires that buyers must qualify for any eligible loan program with their lender (there are many programs that qualify).
While this is the only qualifying requirement of some programs, others have requirements such as requiring that the buyer complete a Home Ownership Counseling Course or provide 1% of their own funds for the transaction. In addition some programs have income/asset restrictions, recapture clauses, reserves required or geographic boundaries. Each program can provide you with their specific requirements and/or limitations
These programs generally participate with FHA, conforming, and jumbo loan products. Most of these programs do not underwrite the loan or add any cost in the form of points, fees, etc., they simply provide the gift for the down payment and/or closing costs.
These down payment assistance programs can be used for Single Family (1-4 unit) homes, Manufactured/Modular Homes, Condominiums, Townhomes, Existing or New Construction, Rehab and Jumbo.
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Other Resources:
Partners in Charity Program
The Genesis Program
Qualifying for a Low Down Payment
Learn about what you need to be considered for a low down payment loan. To be considered for a low down payment loan, you generally need to have:
* Sufficient income to support the monthly mortgage payment
* Enough cash to cover the down payment
* Sufficient cash to cover normal closing costs and related expenses (explained below)
* A good credit background that indicates your payment history or "willingness to pay"
* Sufficient appraisal value, which shows the house is at least equal to the purchase price
* In some instances, a cash reserve equivalent to two monthly mortgage payments
Closing costs, or settlement costs, are paid when the home buyer and the seller meet to exchange the necessary papers for the house to be legally transferred. On the average, closing costs run approximately 2% to 3% of the house price. This percentage may vary, depending on where you live.
Closing costs include the loan origination fee (if not already paid), points, prepaid homeowner's insurance, appraisal fee, lawyer's fee, recording fee, title search and insurance, tax adjustments, agent commissions, mortgage insurance (if you are putting less than 20% down) and other expenses. Your mortgage professional will give you a more exact estimate of your closing costs.
Points are finance charges that are calculated at closing. Each point equals 1% of the loan amount. For example, 2 points on a $100,000 loan equals $2,000. Companies may charge 1, 2 or 3 points in upfront costs in addition to the down payment. The more points you pay, the lower your interest rate will be. In some cases, you may be able to finance the points.
So How Much of a Mortgage Can You Afford?
There are two basic formulas commonly used to determine how much of a mortgage you can reasonably afford. These formulas are called qualifying ratios because they estimate the amount of money you should spend on mortgage payments in relation to your income and other expenses.
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It is important to remember that the following ratios may vary and each application is handled on an individual basis, so the guidelines are just that -- guidelines. There are many affordability programs, both government and conventional, that have more lenient requirements for low and moderate income families.
Many of these programs involve financial counseling for low and moderate income people interested in buying a home and in return, offer more lenient requirements.
Generally speaking, to qualify for conventional loans, housing expenses should not exceed 26% to 28% of your gross monthly income. For FHA loans, the ratio is 29% of gross monthly income. Monthly housing costs include the mortgage principal, interest, taxes and insurance, often abbreviated PITI. For example, if your annual income is $30,000, your gross monthly income is $2,500, times 28% = $700. So you would probably qualify for a conventional home loan that requires monthly payments of $700.
Any expenses that extend 11 months or more into the future are termed long term debt, such as a car loan. Total monthly costs, including PITI and all other long term debt, should equal no greater than 33% to 36% of your gross monthly income for conventional loans. Using the same example, $2,500 x 36% = $900. So the total of your monthly housing expenses plus any long term debts each month cannot exceed $900. For FHA the ratio is 41%.
Maximum Allowable Monthly Housing Expense
26% - 28% of gross monthly income - Conventional
29% of gross monthly income - FHA
Maximum Allowable Monthly Housing Expense and Long Term Debt
33% - 36% of gross monthly income - Conventional
41% of gross monthly income - FHA
One way to determine how much to spend for housing is to compare your monthly income with monthly long term obligations and expenses. Use the worksheet, "Evaluating Your Financial Resources," to determine how much money you can spend on housing. Be sure to only include income you can definitely count on.
When budgeting to buy a home, it is important to allow enough money for additional expenses such as maintenance and insurance costs. If you are purchasing an existing home, gather information such as utility cost averages and maintenance costs from previous owners or tenants to help you better prepare for home ownership.
Homeowner's insurance or property insurance is another cost you will have to consider. The lending institution holding the mortgage will require insurance in an amount sufficient to cover the loan. However, to protect the full value of your investment, you might want to consider purchasing insurance that provides the full replacement cost if the home is destroyed. Some insurance only provides a fixed dollar amount which may be insufficient to rebuild a badly damaged house.
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