I have been spending a lot of time lately reading up on housing, mortgages, refinancing and the like. Part of the reason is that I would like to refinance. Now that might be a little weird considering we just bought the house 9 months ago. However, because home prices have risen and we have a 15-year mortgage I might be able to refinance (depending on Fed policy and interest rates) to an interest rate below 3% and also refinance to 10-12 year loan, which would only be about $50 more in my payment right now. Refinancing would say Mrs. ROB and I about $10k.
Additionally, I am just interested in economic topics in general. If housing is recovering that means the American economy is getting back into full swing. Not sure how long it will be because I genuinely think we are due for a recession in the next 18-24 months, but it is nice to see.
One of the big problems with the recovery is that as housing prices rise, incomes don’t rise as fast and it is extremely difficult for some people to get into buying their first home. Normally, first-time home-buyers make up 40% of all home sales. At the moment they amount to only about 33%. There are a number of reasons for this, but one of them is the cost of housing and getting a down-payment. To avoid mortgage insurance you need a 20% down payment. The problem is that most people don’t have 20% or $40-50,000 lying around. So how can you buy a house with that low of a down payment?
Getting A Down Payment
I wish I could offer some sure-fire ways of getting a down payment. But there is no magic wand to get thousands of dollars to magically appear. Here are some things you could think about.
1) Tap your Roth IRA. I am usually not in favor of tapping retirement accounts for other than retirement, but the great thing about the Roth IRA is that you can withdraw contributions at anytime and you can withdraw up to $10,000 for a down payment on a house.
2) Pay minimum payments on all debts and put all the rest of your monies toward building a down payment.
3) Move into a smaller apartment/house that is cheaper to save money for a larger down payment. Typically, if you can do that you can save a few thousand dollars within a year or so. If you save $300-$400 a month in rent you could save a 3% down payment fairly quickly.
4) Sell something. Have you ever thought about moving down in car? Selling a second car/boat? How many toys do you need? If you really want to get into a house why not sell items that go down in value. Heck, if you have a newer car, why not sell it, pay off the loan and if you have money left over put it into your mortgage down payment.
5) Obtain a personal loan of some kind. There are a number of different companies out there that offer personal loans at a fairly low-interest rate (if you have good credit). By low I mean 6-8%. That may seem high, but considering that credit cards are 13-20%. Lending Club, Propser, and SoFI are part of a new trend where peer-to-peer lending is gaining more traction for people to get money instead of going to a normal bank.
The most ideal way to get a down payment is to save the money. I had to save for over a year to have money for a down payment. It wasn’t easy, but it worked out.
Housing Programs With a Low Down Payment
1) The most common strategy is to get an FHA loan. FHA loans are some of the most common loans out there and typically you only need 3.5% down for your payment, which is great for people to get into the home. A problem with that is FHA loans come with mortgage insurance built in. In other words, to protect the agency from you potentially defaulting you are required to pay a premium (on top of your mortgage) of about $100 or more each month for the life of the loan. That extra $100-$200 can cost you thousands of dollars over the life of the loan, but FHA loans are a good way to potentially get into a house.
2) Explore other loan programs from your bank. As I have stated in the past I only put 5% down on our house. And I am actually paying PMI right now, but that PMI is basically baked into the loan. Because I am a government employee I qualified for a program where I could put 5% down and my mortgage company would charge me an extra .25% interest rate for the life of the loan. Considering I have a fairly low-interest rate and I didn’t have more money to put down the program was really a god-send. Because of your job you may qualify for a program (or your spouse if you have one) that you didn’t know about.
3) Check out your state programs. I can only speak for where I live but both Rhode Island and Massachusetts have some great programs for first-time home buyers. You can actually get loans in Rhode Island with no mortgage down payment if you qualify. Now this program is based upon income, but you can get yourself into a home and begin building equity almost right away. Again, you still need to have proof of income and good credit to qualify, but why not try. Massachusetts has some similar programs through its MassHousing agency. MassHousing is a fantastic agency that has helped a number of people buy homes in the expensive Massachusetts market. If we had bought a home in Massachusetts I am sure we would’ve used these folks.
4) Check out programs in local communities as well. A number of communities may have programs that offer down-payment assistance and/or help with closing costs. Some of these communities maybe a bit more economically depressed and are trying to induce people to move to those communities. However, there are a lot of communities and/or counties that offer assistance based upon the expensive nature of the community, the demographics of the community, etc. So these types of programs are not just based upon low-income situations. There are a variety of factors that go into them. Local housing agencies have all kinds of resources and want to help people get into homes in their communities.
5) Only put one person on the mortgage. If you have a high income earner amongst you as a couple you might try to only have one person obtain a mortgage to qualify for programs or get a better interest rate. This might mean you have to buy a smaller house and/or your mortgage is smaller, but I actually think that is a good thing. That is what Mrs. ROB and I did. Mrs. ROB owns the house with me (she is on the deed) but technically my name is on the mortgage. We did that for a number of reasons, primarily because with my credit background I qualified for a much better interest rate. Also, since Mrs. ROB has only lived in this area for a short period of time I have a much longer and stable work history than she did in the area. FInancially, it meant a smaller house, but that is fine with me.
*If any of you reading this are thinking you may not qualify because of income you might still want to look into this. In the area where we live, because home prices are so high, people who would be able to easily afford a mortgage in the Midwest or the South can get a mortgage that they might not qualify for in the past. There are many programs where you can make well into the low six-figures and still qualify. So it is at least worth exploring.
Home ownership can be a great thing. One of the biggest obstacles is getting a down payment for the house. However, there are strategies out there for you to obtain a mortgage with little to no down payment.