When buying a home, first-time borrowers will need money to cover not only their down payment, but a few other costs. Easily adding up to tens of thousands of dollars or more, needing this large sum could push would-be buyers out of the market, requiring them to wait until they have all financial ducks in a row. However,
"Many people assume they have to save 10 to 20 percent of the home's cost," said
She advises checking the three government websites to see what down payment assistance programs are currently available. Additionally, there are other local government agencies who may be able to help with down payment aid.
"But before you start checking - even before you start looking for a home, it's important that you begin saving, just as early as you can," she cautioned, "because you are going to need to invest some of your own funds."
There are three areas of cost that future homeowners will be responsible on or before closing day, she explained. A down payment is usually the largest cost. Another is earnest money - the deposit made at to an escrow account when an offer is made for a home, ensuring the current homeowner that the offer is serious. And finally there are closing costs to be paid at settlement, usually three to four percent of the home loan amount.
"It's important to understand that the less money you put down up front, the more you may have to pay later in monthly payments. In fact, having a larger down payment will in many cases result in a better loan rate," she added. "Nowadays, if your loan is more than 80 percent of the home’s value, you will probably pay a small monthly fee for PMI (private mortgage insurance) - even with a government loan," Smith explained. Additional ideas on securing funds for a down payment include:
• Adhere to a strict budget. Review spending habits and find ways to spend less and live more frugally. Cut out luxuries like that higher-level cell phone plan or premium cable TV, expensive coffees and eating out. Set a monthly savings goal - and stick with it.
• Will a relative provide a down payment loan or cash gift? Several loan programs will allow the entire down payment and closing costs to be paid as a loan or gift. Your lender needs to know about any cash gifts in your loan transaction and may have some conditions. Also, check with your tax advisor about the
• Research first-time home buyer grants available in your area. Typically these help with closing costs and are less than 10 percent of the home’s value. However, these grants do not have to be repaid. They target specific neighborhoods where the government wants to invest in community revitalization. The borrower cannot have owned a home within the last three years. Other qualifying guidelines include minimum credit scores and maximum income limits.
• Lower your sights a little: consider buying a less expensive condo or a fixer-upper home, even a HUD home. "Many urban neighborhoods are undergoing gentrification, and this may be a great way to find a place closer to downtown, even if it needs a little work," Smith explained. "FHA offers a renovation home loan that not only covers buying your home but also many remodeling and updating projects. Just be sure to get a home inspection, so that you're aware of most of the home's issues."
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