Three Options First-Time Home Buyers Have To Get Started

By SCOTT SHELDON (Open Post)

Demand for housing remains strong this spring season. Renters are finding buying a home may even, in some cases, be less than renting. If you don’t have a lot of cash, but are looking to purchase your first home this year read on….

How Much Cash You Will Need

Hint- it’s less than you think…

Twenty percent down needed to purchase a home is 20-years-ago thinking. Putting down that 20 percent chunk does still give you the lowest possible payment in relationship to how much house price you’re gunning for, but it is by no means a requirement nor should it be thought of as the end all be end-all to purchasing your first home. The magic down-payment amount to purchase a home is 0 percent, no money down. Yes, you need not have a down payment to purchase a house. Alternatively a 3 percent down, or more common a 5 percent down, can help strengthen an offer. Don’t forget about a loan insured by the Federal Housing Administration (FHA) with as little as 3.5 percent minimum down payment. Each program can help a first-time buyer get in the door all with a 30-year fixed rate payment containing no banking prepayment penalties or hidden terms.

USDA-the US Department of Agriculture allows people in less industrialized areas to purchase a home without putting any money down. You’ll need the cash for closing costs, or you can ask the seller for the credit for closing costs. The loan allows a buyer to purchase a home up to the conforming loan limit working with the standard $417,000 conforming loan size. As long as you can qualify, the program does not require a down payment.

Conventional-the more traditional mortgage loan program, recently announced as little as 3 percent of the purchase price is all that’s needed for a down payment. Similar to USDA, the qualifying standards with the 3 percent down option is more stringent than if you were working with the more standardized 5 percent down-payment option. Investing 5 percent down will cast a wider net of opportunities of homes available to you in the marketplace because of how much stronger you look on paper. Five percent down is available all the way to a maximum conforming loan size of $417,000. If your loan amount exceeds 417,000 for a single family home, you’ll need at least 10 percent down with conventional financing as your loan is considered to be conforming high balance, aka also called Jumbo.

FHA-the Federal Housing Administration insures mortgage loans with as little as 3.5 percent down payment all the way to the maximum conforming loan limit size. The conforming loan limit size does surpass $417,000 in many markets, for example in Sonoma County up to a $520,950 loan size. The FHA has risen in popularity as the ability to qualify for such financing is incredibly lenient. The FHA routinely signs off on previous unfortunate credit circumstances including short sale, foreclosure or even bankruptcy in the last few years.

Your Cash Is Not Limited To Down Payment Funds Only, Closing Costs Must Also Be Budgeted

While it is true you need not have any money for a down payment to purchase a house, the transactions that are actually closing in strong real estate markets are the transactions supported with strong home buyers coming in with the least of 5 percent or 3.5 percent down payment. Closing costs are another factor to take into consideration that go beyond your down-payment funds in procuring a mortgage to buy a home. If you can come up with the down payment, you can always ask for a seller credit for closing costs or even obtain gift money from family if cash is still tight. Total closing costs on average can be about 2.5 percent of the purchase price. Here’s a broader range of total closing costs working with less than 20 percent down on buying a home with some example purchase price points.

Home purchase between $500,000-$600,000 you’ll need it least $10k for closing costs

Home purchase between $300,000-$500,000 you’ll need at least $8-10k dollars for closing costs

Home purchase from $150,000 $300,000 you’ll need it least $7,200 for closing costs

These numbers should give you an approximation in helping you amass how much funds you have to spend on a home purchase. Acceptable sources for procuring cash to close on a house can be one or any of the following:

• Stocks
• Bonds
• IRA
• 401(k)
• Checking/ Savings
• Any form money market account
• Retirement account
• Gift Money
• The key is the money needs to be documentable

Don’t have cash available in any of the above mentioned places? Even these places are still considered acceptable because it can be paper trailed:

• Security deposit refund on your current rental
• Tax refund
• Any side monies you might have homes sitting in a safe can actually be used for transaction as long as the money is deposited in a bank account and sits for 60 days to meet banking seasoning requirements
• Selling of personal property such as a car or motorcycle - these monies can be used as well too, and will need to be documented with a bill of sale and a bank account matching the funds deposit
• Loan against a retirement account to come up with the down payment is also OK, as well. The lender will need to get borrowing terms of the 401(k) loan to purchase your first home

Home Buying Tip: Line up the monies before you go house hunting. Have a statement showing proof of funds to close that you can submit with your pre-approval letter when you identify a house on which you want make an offer, especially if cash is tight.

Being A First Time Home Buyer

This is someone who has not owned a home before in the last three years in eyes of a mortgage lender. Additionally, the first-time homebuyer tax benefits and incentives have long since expired from years when the federal government was trying to bolster homeownership in leaner economic times. The ability to purchase a home as a first-time buyer in today’s real estate market means working with a traditional mortgage loan program and having money in the bank to best position yourself for not only being responsible as a home borrower, but also demonstrating you have the merit and capacity to purchase a home.

Other recent columns from Scott:

• Here Are Several Reasons You May Be Denied A Home Loan
• Buying A Home? What Else Besides Your Income Matters?
• Applying For A Mortgage? That Will Not Tank Your Credit Score
• What You Need To Know About Getting A Mortgage In Today’s Environment
• Be Careful With Credit Cards When Buying A House
• Why A Short Sale House Is Still A Good Deal

Scott Sheldon is Senior Loan Officer and consumer advocate based in Sonoma County, CA. Scott has been originating home loans for nearly decade. His weekly consumer articles offering key mortgage insight and credit tips can be seen in Yahoo! Finance, AOL Real Estate, Business Insider, Realtor.com, Fox Business, MSN Money and many others.

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