First-time home buyers usually encounter a mixture of both excitement and fear. The amount of money alone can be head-spinning.
Traditionally, lenders expected borrowers to put down 20 percent of the house’s purchase price as a down payment. But in recent years, borrowers have been able to put down as little as 10 percent, 5 percent, or even nothing if they are military veterans and obtained a Veterans Administration loan.
In a healthy real-estate market, home prices climb; as a result down payments and closing costs also grow.
The first step in determining what you can afford is to figure out your income and expenses, then plug the information into a work sheet offered by books such “Home Buying for Dummies” by Eric Tisane and Ray Brown (IDG Books) or “10 Steps to Home Ownership” by Alack R. Glint (Times Books). Lender Web sites also offer such worksheets.
Once you have those figures, you can begin to do some informed sleuthing for financing options. Even those who don’t believe they have enough for a down payment or a monthly mortgage can probably find some creative options, assuming their financial house is in order.
The following is just a sampling of what’s available:
*Low-money-down loan programs.
There are a number of lenders that offer mortgages in which you can put down 10 percent, 5 percent or 3 percent of the purchase price. Of course your credit will have to be good and you’ll need to purchase private mortgage insurance. The trade-off is likely to be higher interest rates and more up-front fees, according to the authors of “Home Buying for Dummies.”
*Lease to Buy.
Perhaps you don’t have the money to make a down payment, but you can make monthly mortgage payments. You might be able to find a seller who will offer a one-year or more, renewable option to buy the home while you rent it from them. A percentage of the rent will be credited as the down payment, along with a nonrefundable option fee.
There’s no set rule for how to do this. Some owners will credit your payments at 33 percent, others may go up to a full 100 percent. Obviously, you’ll want to aim for the latter, while the seller will probably want to go as low as possible. The results will depend on your negotiations.
Remember, however, that the purchase price and terms of the sale must be settled as though you were buying the house outright, even if it may be several years before you actually take ownership.
*Seller financing.
In this scenario the seller is also the lender and gives you a loan to purchase the property. This can be good for both parties, according to “10 Steps to Home Ownership.” Buyers can benefit from the current interest rate and not have to pay points or other so-called junk fees. Sellers can get a higher return on their money from the sale and it comes as additional monthly income.
Older homeowners moving to an apartment or smaller home are usually a good resource for seller financing since they won’t need the cash from the home sale to finance the purchase of their next home. Another option may be a seller who doesn’t live on the property or someone who has already paid off the mortgage.
*Family help.
We all hate to ask, but perhaps this is the one time you can go to parents or other family members for help with the down payment. Actually, it’s pretty much a generational tradition. Your parents probably hit up your grandparents for help the first time as well.
Check tax laws first, but currently the federal government has allowed two parents to gift a child up to $20,000 per year without being taxed. Be sure, for family harmony’s sake, that you put in writing the conditions, if any, of the loan/gift such as the timetable for repayment and any interest to be paid.
If a loan is not feasible or you have the money for a down payment but can’t qualify on your own for the loan, you could ask a family member to co-sign the loan. Of course, that means that they are, along with you, responsible for paying it back. If your parents are the co-signers and they die during the period of the loan while they are co-signers, Glint warns that the government may treat the signing as a gift and you may owe inheritance or gift taxes on this. So check with an accountant or tax attorney first.
*Community development block grants.
First-time homeowners with low to moderate incomes can benefit from community development block grants if they buy in certain designated communities. Nonprofit housing agencies, eager to develop the neighborhood, participate in these programs, which give cash assistance or below-market interest rate loans to qualified buyers. Contact your local municipal housing agency to find these programs.
*Housing partnerships.
This unconventional approach is like a business deal, in which two or more people team up to buy a property. It could be a house or perhaps a duplex. It can involve a roommate situation, a parent or family member making a real-estate investment or even an institutional investor. The way it works is that the homeowner or managing partner buys perhaps 50 percent to 60 percent of the house’s purchase price and lives in the residence, while the limited partner pays the rest, as well as the corresponding percentage of the monthly mortgage.
The partner gets the payoff when the house is eventually sold, hopefully at a higher price, and he or she gets a percentage of the final sale price.
This can substantially cut down the investment of the first-time home buyer but it is complicated and will involve the participation of a real-estate attorney to draw up a contract between the two parties.
*Foreclosure property
If you’re very diligent and very lucky — and willing to make major repairs — it’s possible to get great deals on foreclosure property. Because most lenders are eager to recoup the unpaid amount of the loan, you can probably get a substantially lower price for the house and work with them to finance the property — and it takes little or no money down.
Check with your local community college for seminars on how to buy foreclosure property or ask your real-estate agent to explain the process. This technique can get you into a very good house, but you’ll want to find out all the details to see if it’s the right approach for you.