Down Payment Assistance Programs

Is an Economic Recession a Good Time to Buy a House?

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The Housing Crisis of 2008 had long-lasting effects on homeowners. It took almost a decade to see changes in home values or at least worthwhile changes. Now there’s the coronavirus pandemic and we’re in another recession, but this time it’s different.

We aren’t dealing with rock-bottom housing prices or mortgage lenders facing repeated losses due to a multitude of foreclosures. While millions of Americans are out of a job still, the housing market hasn’t nosedived yet.

But since we’re in the midst of the recession, now may be a great time to buy a home, here’s why.

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Low Interest Rates

We can’t love coronavirus for the toll it took on many lives, but it lowered interest rates. If there’s a silver lining, there it is.

Interest rates are the lowest they’ve been since the housing crisis. If you’re waiting for the ‘perfect payment,’ you may get it now. While the Fed keeps its rates low to keep money moving in the economy, it’s a great time to take advantage of mortgage rates and buy a home.

Choose a fixed rate loan to have that rate locked in and you don’t have to worry about what happens in the next few years.

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Lower Housing Prices

Anyone selling their home now needs to move. They aren’t doing it because they want to size up or moving just for the fun of it. They either can’t afford the mortgage, but don’t want a foreclosure or their job moved them.

Either way, sellers are motivated, which makes them more likely to negotiate.  While you can’t steal the homes, you may pay much lower prices than during a regular economy.

Sellers Give More

Motivated sellers provide more help. If you want the window treatments or furniture included, sellers may oblige. If you need closing cost assistance or can’t close for 60 days, sellers may agree. They know buyers are scarce, so they won’t run you off by saying no to your demands.

Less Competition

Even with low rates, many buyers can’t get a loan. Many potential buyers don’t have the down payment or don’t have a job so they can’t borrow money. This means fewer buyers in the market. With fewer buyers bidding for the same home, you get what you want without hassle.

Homes Sit Longer

Recessions make qualifying for a mortgage hard. If buyers can’t get financing, homes don’t sell. The longer homes sit on the market, the more desperate sellers get. If a home sits long enough, sellers may lower the asking price before you even bid. Once you find the home and negotiate, you get quite the deal on the home.

Watch out When Buying a Home During a Recession

Buying a home during a recession has many benefits, but there are downsides.

  • What happens if you lose your job? No job is 100% secure, especially during a recession. Even with the best deal, if you don’t have a job, a mortgage may be unaffordable. Now you put yourself at risk of foreclosure.
  • Banks get tougher. Recessions affect banks too. They won’t lend to just anyone. Lenders make sure you can afford the loan. They may require you to have liquid assets in an emergency fund too. They have to protect themselves from loss.
  • Investors may be lurking. Recession prices are an investor’s goldmine. Buying homes at rock bottom prices and selling them for a lot more when the economy improves is the perfect recipe for investors. With more buyers in the market, competition increases.

Buying a home during a recession may have a great outcome. Do your homework like you would during any economy. Check the loan’s affordability, the home’s historic values, and make sure you love the neighborhood. A home is one of the largest investments you’ll make in your life; enter the transaction with caution for the best results.

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Down Payment Requirements for Conventional, FHA, VA, and USDA Loans

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If there’s one thing that holds many potential homebuyers back from buying a home, it’s the down payment or lack thereof. It’s hard to save money while paying rent and dealing with the standard cost of living. Many people avoid buying a house because they don’t have the standard 20% down payment that they assume that they need.

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In reality, this isn’t the case. Even conventional loans don’t require a 20% down payment. Keep reading to learn the minimum down payment for each program to see which one you may qualify for after all.

Conventional Loan Down Payment Requirements

Conventional loans carry the myth that you need to put 20% down on them, but you don’t. You can get away with a down payment as low as 5%. Let’s look at how different that looks.

Let’s say you want to buy a home for $200,000. If you abided by the 20% rule, you would need $40,000 for the down payment. If you put down the minimum down payment, though, you’d only need a down payment of $10,000. That’s a difference of $30,000 and probably many years of saving for a down payment.

Conventional loans do require you to pay Private Mortgage Insurance if you do put less than 20% down on the home, though. This shouldn’t be a deal breaker though. PMI is insurance that protects the lender as long as you owe more than 80% of the home’s value. Once you owe less than 80% of the home’s value, though, you can have the lender eliminate the PMI from your loan without requiring you to refinance the loan.

Conventional loans do have stricter guidelines than other loan programs. You will need:

  • 680 credit score or higher
  • 28% housing ratio (your mortgage payment can’t exceed 28% of your gross monthly income)
  • 36% total debt ratio (your total mortgage payment can’t exceed 36% of your gross monthly income)
  • Stable employment and income
  • FHA Loan Down Payment Requirements

FHA loans require an even lower down payment. You can put down as little as 3.5% of the home’s purchase price and get an FHA loan. This could save you 1.5% compared to the conventional loan. FHA loans do charge mortgage insurance on your loan as well. The difference with FHA loans, though, is that they charge you mortgage insurance no matter how big or small your down payment is on the home.

FHA mortgage insurance also lasts for the life of the loan. Unlike conventional loans, you can’t get it eliminated. As long as you have the FHA loan, you pay the mortgage insurance. The only way to eliminate it is to refinance the loan into a conventional loan once you owe less than 80% of the home’s value.

The FHA loan has more flexible guidelines than the conventional loan:

  • 580 credit score
  • 31% housing ratio
  • 41% total debt ratio
  • Stable income and employment
  • Proof that you’ll live in the home as your primary residence
  • No defaulted federal debt

The FHA also has one exception to the credit score rule. You may be able to get away with a credit score as low as 500 (if you can find a willing lender). The difference is that you will have to make a minimum down payment of at least 10% if you have a credit score lower than 580.

VA Loan Down Payment Requirements

If you are a veteran of the military, you have the good fortune of securing the VA loan. You need to prove that you are entitled to this benefit by providing your Certificate of Entitlement. You can obtain this if you have served at least 90 days during wartime or 181 days during non-wartime. If you served in the National Guard or Reserves, you must serve at least 6 years. No matter your branch of the military, you must also have an honorable discharge.

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If you are eligible for the VA loan, you don’t need a down payment. You can get a 100% loan. This makes it much easier for veterans to become homeowners. The VA is able to offer this option because they guaranty the loans. In other words, they back the lenders up if you default. The VA will pay the lender back 25% of the amount that they lost.

VA loans don’t require mortgage insurance. You do pay an upfront funding fee equal to 2.15% of your loan amount for regular military members and 2.4% for members of the National Guard or Reserves.

VA loans also have flexible guidelines:

  • Minimum 620 credit score
  • Maximum 43% total debt ratio
  • Enough disposable income to meet the requirements for your area and family size
  • Proof that you will live in the home as your primary residence
  • No defaulted federal loans

USDA Loan Down Payment Requirements

USDA loans are another 0% down payment option. In order to be eligible for the program, you must purchase property in a rural area according to the USDA standards. You must also have a total household income that is equal to or less than 115% of the average for the area.

If you are eligible, you won’t need a down payment for the USDA loan. You can borrow 100% of the home’s purchase price as long as it’s a modest home for the area. The USDA does charge both upfront and annual mortgage insurance. You pay the annual mortgage insurance for the life of the loan, as you do for the FHA loan. The only way to cancel it is to refinance the loan into a conventional loan.

In order to qualify for a USDA loan, you must:

  • Have a 640 credit score or higher
  • Have a maximum 29% housing ratio
  • Have a maximum 41% total debt ratio
  • Prove that you will live in the home as your primary residence
  • No defaulted federal loans

As you can see, you have many options for loans even when you don’t have a 20% down payment. Explore your options and see which loan will work the best for you to become a homeowner.

Meta Description: You don’t need a 20% down payment for most loan programs today. Learn the lowest amount you can put down for each of the loan programs today.

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Seasoning Guidelines for Your Down Payment

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When you make a down payment on a home, you can’t just use random money to make it. Lenders need to know where the funds originate. In other words, they need the funds to be seasoned. Just what does that mean and how do you prove it? Keep reading to learn all about it.

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What are Seasoned Funds?

Lenders will ask to see your bank account statements for the last 60 days (2 statements). On these statements, they will look for large down payments that don’t’ coincide with your income. If there are large deposits during this time, you can expect the lender to inquire about the source of the funds.

If a lender asks about the deposit, you need to provide proof of where the funds originated. For example, did you get a tax refund or a bonus from work? Those funds are easy to prove and typically acceptable with a lender. If you can’t prove the origination of the funds, though, the lender may assume that the money is from a loan. Lenders cannot accept down payment funds that come from a loan. This affects your debt ratio and your ability to secure the new mortgage.

What’s the Problem With a Down Payment Loan?

Many lenders shy away from borrowers that have to borrow the funds to put down on a home because it puts another lien on the home. If you don’t have any of your own money invested in the home, you pose a higher risk of default. What if you run into financial trouble? Will you care if you walk away from the home? If you didn’t have any of your own money put down on the home, it may be easier to just walk away from it.

Proving Your Funds are Seasoned

So how do you prove that you have seasoned funds? It’s simple – have them in your account for at least two months. Lenders are comfortable with this method because if you did in fact take out a loan for the down payment funds, it would show up on your credit report within that 2-month period. Even if your funds are ‘seasoned’, you can’t hide the loan from the lender.

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Now, what about funds that are legitimate, but may not be seasoned? There are a few exceptions to the rule:

  • Regular contributions to your savings – If you have payroll deductions or other automatic savings plans set up to create your down payment, you don’t have to wait 60 days after you hit the down payment threshold. You can show the lender your pattern of regular savings contributions, which is usually enough to consider the funds seasoned and available for use.
  • Gift funds – If you have a family member or close friend that is giving you gift money for your down payment, you don’t need to wait 60 days after you receive the funds. You do, however, have to have a paper trail to show that the funds are a gift. This includes a gift letter from the donor, proof of receipt of the funds with a deposit ticket, and proof of deposit in your own account.
  • Retirement funds – If you use your 401K or IRA savings to put money down on a home, you don’t have to season those funds either. Again, you’ll need that paper trail to show lenders where the money came from and whether or not it’s required to be paid back, (401Ks usually have to be paid back).

Have Explanations

The best thing you can do if you have unseasoned funds is have an explanation for the lender. Anything that you can put in writing and include proof of the origination of the funds will help. Lenders are going to scrutinize every deposit you make unless they know it’s tied to your income. The more proactive you are with supplying the proof of its origination, the better your chances of the lender accepting it.

Your explanation must be detailed and truthful. Again, the paper trail speaks for itself. It gives the lender something to rely on rather than just your written word. If you have a decent explanation of the origination of the funds and it’s clear that it’s not any type of loan, you may be able to get away with using it for your down payment.

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Finding the Best Home Renovation Loan Program

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Home revocations are expensive. Fortunately, there are programs available today that make them more affordable. Tapping into your home’s equity, you can invest the funds right back into your home with one of the many home renovation loans available today.

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Keep reading to learn which program may be best for you.

The Home Equity Loan (Line of Credit)

Most people think of a home equity loan or line of credit for home renovations. This is probably the simplest loan program since it’s a second lien on the property. You can typically borrow up to 85% of the home’s current value with either loan option.

The home equity loan is a fixed second loan that provides you with a lump sum of funds to make the renovations. Upon receiving the loan, you start making principal and interest payments right away on the full amount. Most home equity loans have a term of 20 years and a fixed interest rate. You receive the funds once and that’s it. The home equity loan is good for projects that have a set budget and you will only need one time.

The home equity line of credit is a revolving loan. It works like a credit card. You get a credit limit to spend and access to it. You don’t have to draw any funds out right away. If you do draw funds out, you pay interest only on those funds. You can choose to make principal payments on top of the interest, but it’s not required. If you do pay the principal back, you can reuse the funds for up to 10 years.

After the 10-year draw period ends, you must make principal and interest payments for the next 20 years. You cannot withdraw any funds once the draw period ends. The HELOC is good for borrowers that don’t have a fixed budget in mind for the home renovations or that will need repeated access to the funds.

Refinance Your First Mortgage

You can also wrap all of your needs into one loan with the cash-out refinance. If you don’t have a great interest rate on your first loan right now, taking a cash-out refinance can simplify things. You borrow as much as you need to pay off your existing mortgage, plus any cash you need for home renovations. You can typically borrow up to 80% of the home’s value with a cash-out refinance, if you qualify.

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Cash out refinances work like the home equity loan. You receive your equity in one lump sum. You can do what you wish with the funds. You’ll pay principal and interest payments on the amount borrowed right away. The interest rate on a cash-out refinance may be a little higher due to the risk the lender takes, so make sure you pay careful attention to the mortgage payment amount.

Take Out a Rehab Loan

There are several rehab loans that you can take out to renovate your home too:

  • FHA 203K – This government loan has flexible guidelines like the standard FHA loan. It provides you with funds to refinance your existing loan plus the cost of home renovations on your primary residence. You can borrow up to 110% of the home’s after-improved value for home renovations. You’ll need a 3.5% down payment and minimum 580 credit score. You can opt for the Streamline FHA 203K that allows up to $35,000 in renovations with no structural changes or the full FHA 203K with stricter requirements, but that doesn’t have a limit on the dollar amount or type of renovations.
  • HomeStyle Loan – The Fannie Mae HomeStyle Loan is the conventional version of the rehab loan. You’ll need a slightly higher credit score of 620 and at least a 3% down payment. Conventional loans have slightly stricter underwriting guidelines, but the HomeStyle Loan allows you to renovate your primary, investment, or second home. You can borrow up to $484,350 with the renovations taking up no more than 75% of the after-repaired home value.

The best home rehab loan for you depends on your circumstances. Do you like your current first mortgage? If you’d rather leave it untouched, you’ll need to take out a home equity loan or HELOC. If you aren’t attached to your first mortgage and don’t mind refinancing it, any of the rehab loans or the cash-out refinance can be a good option. Think about your qualifying factors and if you need the FHA loan for its flexible guidelines. If you qualify for conventional financing, your best bet is to try the cash-out refinance or Fannie Mae HomeStyle loan.

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Understanding Discount Points

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When you take out a mortgage, you have to lock in your interest rate. It’s a big decision as it affects your mortgage payment and the total cost of your loan. In the process, your lender may offer you the option to pay discount points. Before you jump at the chance, you should understand what they are and how they affect your loan.

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What are Discount Points?

A discount point is a fee you pay upfront (at the closing) to lower your interest rate. You may hear lenders say that you are ‘buying down your interest rate.’ You can consider it prepaid interest. Rather than the lender charging you a higher interest rate, they charge you a fee upfront. You pay the interest ahead of time in order to get the lower interest rate.

How Much do Discount Points Lower your Rate?

The question everyone wants to know is how much they will save. This does vary by lender. In general, lenders lower your interest rate by 0.25% for every point you pay. One point equals one percent of the loan amount. If you borrow $200,000, one point equals $2,000 and is paid at the closing.

Again, the exact amount varies by lender. Always ask the details about the discount points. Ask to see both interest rates – the rate without points and the rate with points so that you can make an informed decision. Some lenders may offer the option to pay a full point, half a point, or even one and a half points. Every situation is different.

What do Points do For You?

If you pay discount points, it lowers your interest rate for the life of the loan. As long as you keep the same loan, you keep that rate. You don’t have to pay any fees in the future, either. It’s a one-time fee. Lenders charge it to collect the interest they otherwise would have earned on your loan over its lifetime. The lender comes out the same in the end – it’s you that sees the difference.

Is it Worth it?

This is what you should really focus on – is it worth it to pay points? Looking at it from the surface, who wouldn’t want to lower their interest rate, right? But sometimes it doesn’t make sense to do so.

You should figure out your break-even point. This is the point that you pay back the money paid for the points and start reaping the savings of the lower interest rate. Here’s how it works.

Figure out how much you’ll save on your monthly payment by paying the discount points. Let’s say the difference in payments is $100. Next, determine the exact cost of the points. Let’s say the points cost you $2,000. It would take you 20 months to pay back the money paid for the points:

$2,000/$100 = 20 months

This is your break-even point or the point that you start reaping the savings of the new, lower payment. Use that break-even point to decide if paying the points is worth it.

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Think about how long you’ll be in the home. Let’s say you plan to move in three or four years. It may not make sense to pay the fee upfront just to save $100 for a few months or even two years. If you know that this is your ‘forever’ home and you don’t plan to refinance in the near future, paying the points makes sense. You’ll save $1,200 per year on the interest. Add that up over 10 or 20 years and you’ll save a lot of money.

If you aren’t sure of your plans, you may want to skip the discount points, or keep them as low as possible. For example, maybe you split the difference with the lender. Rather than paying a full point, you pay a half of a point and lower your interest rate slightly. This way you still save money and it’s not the end of the world if you end up moving or refinancing in the near future.

Of course, before you pay points, assess your financial situation. Will it hurt you to pay those points upfront? If you need the money for your down payment, closing costs, or just to get into the home comfortably, don’t pay it. You can use the money now and pay the loan down as you can. You can always make extra principal payments toward your loan in the future, which ultimately decreases the total amount of interest that you pay over the life of the loan.

Whether or not you pay discount points is a personal decision. Compare all of your options not just from one lender, but several. This way you can choose the loan that makes the financial sense now and well into the future. Remember, buying a house is one of the largest investments you’ll make in a lifetime.

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How to Correct Mistakes on Your Credit Report

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Have you checked your credit report lately? If not, you should. Did you know that more than 40 million Americans have mistakes on their credit report? Many people don’t even know it because they don’t check their credit regularly.

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First, we’ll discuss how to check your credit report and then help you learn how to fix any mistakes you find.

How to Check Your Credit

Did you know that you have access to a free copy of your credit report annually? In fact, you have access to three credit reports per year – one from each credit bureau. Trans Union, Equifax, and Experian each have their own credit report for you. If you visit www.annualcreditreport.com, you can get access to your free report every year.

We suggest that you pull one report every few months throughout the year. This way you spread out how often you check your credit report. This gives you a better chance of catching errors early on and fixing your credit score before it gets too damaged.

Fixing Errors

Now that you have your credit reports, go over them with a fine-toothed comb. Look at every line. Do the trade lines belong to you? Are the balances right? Is the payment history correct? Do you notice anything that is incorrect?

Don’t forget to look at all the data. This includes personal information, public records, and all financial information. Anything that is incorrect should be fixed.

You’ll need to file a dispute with the credit bureau. Make sure you contact the bureau that has the incorrect information. Sometimes it’s just one bureau and other times it’s all three. If the mistake was on the part of the credit bureau, chances are that only one will have the mistake. If the creditor made the reporting mistake, though, it’s worth checking all three credit reports for the inaccurate information.

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You can file the dispute online, via phone, or regular mail. Each bureau has its own requirements, but in general, you must:

  • Provide the information about the dispute. Tell the credit bureau in detail why you think the information is incorrect. Are numbers transposed? Does the trade line not belong to you? Is the payment history incorrect? Give as much detail as possible so that the credit bureau is able to change it effectively.
  • Provide information about the dispute to the creditor. You should also let the creditor know about the incorrect information. Provide the creditor with the same information you gave the credit bureau including the reason why you think the information is incorrect.
  • Provide as much proof as possible. The credit bureau and creditors may or may not take your request seriously if you don’t have proof. Gather as much paperwork as you can to prove your point and supply copies to the credit bureau and creditor.
  • Ask for a specific action. Think about what you want out of your dispute. Do you want the information deleted? Do you just need the data corrected? Be specific with your request so the outcome is the one you desire.

Credit bureaus typically have 30 days to investigate your request. The issue may not get resolved in 30 days, but the credit bureau must start the investigation within that time. The exact time that it takes depends on the willingness of the creditor. If they drag their feet, it may take longer. That’s why it’s important to stay in contact with the creditor too.

How to Handle a Dispute That Doesn’t go Your Way

Your dispute may or may not go your way, there’s no surefire way to tell. If the creditor denies your dispute, you can request that the credit bureau put a copy of the dispute on file. They can also add a statement to the trade line stating that you dispute the tradeline and the reason.

Future creditors will see the dispute and decide how to handle it. Some may ask you questions about it. Others may just look over the tradeline, especially if it has negative information reporting. The exact circumstances of the situation will determine the outcome.

The most important thing you can do is stay on top of your credit information. You’ll need a good credit report to get new loans, get insurance, rent a home, buy a home, and even sometimes get a job. Be vigilant in checking your credit report and requesting changes if there are any errors. It’s worth the time and effort it takes to fix the errors on your report.

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How Does Mortgage Insurance Work?

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Many loans today require mortgage insurance including conventional, FHA, and USDA loans. You can only avoid mortgage insurance if you put down at least 20% on a conventional loan. All FHA and USDA loans carry mortgage insurance regardless of the amount of your down payment. Knowing how it works and what to expect can help you prepare for a mortgage.

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What is Mortgage Insurance?

If you have to pay mortgage insurance, know that it’s coverage for the lender, not you. You pay the premiums, but the protection covers the lender should you stop making your payments. Government-backed loans require the insurance in order for the FHA and USDA to guarantee the loan. The FHA and USDA don’t write or fund loans – instead, they guarantee them for the lender. This is how lenders are able to give loans with flexible guidelines, like credit scores as low as 580 or debt ratios as high as 41%.

Conventional loans require PMI or Private Mortgage Insurance if you put less than 20% down on the home. Without 20% down, you pose a higher risk of default. In order for lenders to write the loan, they want the protection of Private Mortgage Insurance. If you stop making payments, the lender will receive reimbursement from the insurance company.

How Government-Backed Mortgage Insurance Works

If you use FHA or USDA financing, you actually pay mortgage insurance twice. The first time is at the closing. You’ll see it called the upfront funding fee or upfront mortgage insurance. This money goes straight to the FHA or USDA. The FHA charges 1.75% of the loan amount upfront and the USDA charges 1% of the loan amount. You can pay the fee in cash at the closing or wrap it into your loan amount.

The FHA and USDA also charge annual mortgage insurance. The name is deceiving, though, since you pay it monthly. The lender pays the premium to the insurance company on your behalf once a year, but you pay 1/12th of the premium each month with your mortgage payment.

Government-backed mortgage insurance lasts for the duration of the loan. If you take out a 30-year loan and you keep the loan for the entire term, you pay mortgage insurance the entire time. The only thing that differs is the amount of the premium that you pay. FHA loans, for example, charge 0.85% of the outstanding premium each year. The lender calculates your premium based on your average outstanding balance each year, as you pay the balance mortgage balance down, your premium decreases.

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How Conventional Loan Mortgage Insurance Works

Conventional loans have Private Mortgage Insurance because they aren’t backed by a government entity. The PMI comes from several different companies – each lender typically has a company they prefer to use. Each insurance company has different pricing too.

You only pay PMI if you put less than 20% down on a home, though. The amount you pay remains the same for the term you must carry it. This is where PMI differs from government-backed mortgage insurance, though. You only pay PMI until you owe less than 80% of the home’s original value. You can determine when this will occur by looking at your PMI Disclosure or amortization table.

Once you owe less than 80% of the home’s value, you can request PMI cancelation in writing. The lender will evaluate your situation and decide at that point if you qualify to cancel the insurance. Lenders look at:

  • Your payment history – Do you make your payments on time?
  • Your current housing history – Are you current on your payments?
  • The home’s current value – Did the home’s price remain stable or appreciate?

If you make your payments on time and are current on your payments, most lenders will allow cancellation of your PMI.

If you don’t cancel the PMI once you hit the 80% point, the lender must cancel it once you owe less than 78% of the home’s original value – it’s the law.

The lender reserves the right to not cancel the insurance if your home’s value decreased or you are behind on your payments. Remember, the insurance protects the lender should you default on your loan. They take a big risk when letting the insurance go.

Getting Rid of Mortgage Insurance

Whether you have a government-backed loan or a conventional loan, there’s one way to get rid of mortgage insurance once and for all – refinance. Of course, you need all of the right pieces to fall into place.

If you have a government-backed loan and you owe less than 80% of the home’s value, you can refinance into a conventional loan. If you have a conventional loan, but have paid the balance down significantly or the home appreciated a lot, you may refinance the loan, order a new appraisal and get rid of the PMI.

Mortgage insurance seems like a nuisance, but it helps you get the financing you need. With an insurance policy in place, lenders are more likely to give you the financing you need, even if you have a high LTV or even a low credit score.

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What Does Seller Assist Mean?

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If you don’t have enough money for a down payment on a home, you may wonder about the seller’s ability to help. While the seller can help with many different costs regarding your home purchase, the down payment is not one of them. If a seller were to help you with the down payment, it could be considered an inducement to purchase – or in other words, a bribe.

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What’s an Inducement to Purchase?

If you are hemming and hawing about whether you want to buy a home or not, the seller could sway you by telling you he will help with the down payment. That could convince you to buy the home, even if it wasn’t your original intent. If you meet with financial difficulty down the road, you could blame it on the seller and the fact that he ‘bribed you’ to buy the home.

Other Ways Sellers Can Help

Luckily, there are other ways that sellers can help you with your loan. If you can’t get a down payment, consider the VA or USDA loan program. If you are a veteran, you can use the VA loan program, if you buy a home in a rural area and are a low to moderate-income family, you can use the USDA program. If neither of those options work, the FHA loan requires just 3.5% down on the home.

Once you figure out your loan program, you can have the seller help you with the closing costs. This is called seller concessions. This is money the seller gives you to help you cover the closing costs. Most loan programs allow the seller to contribute up to 6% of the sales price of the home. This is separate from the down payment, though. The seller can help you cover any lender fees as well as third-party fees. Keep in mind, though, the money the seller gives you is really money you are borrowing from the bank to buy the home. The seller increases the price of the home accordingly, which means you borrow the money to cover the closing costs.

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Here’s an example:

You agree to buy a home for $150,000. Before you sign the contract, you decide to ask the seller to help you with the closing costs. The total closing costs are $8,000. The seller agrees to pay them, but you have to increase the sales price to $158,000. As long as the home appraises for at least $158,000, you should be okay. This means that your monthly payment is now a little higher and you pay interest on the $8,000 that the seller will give you at the closing. The seller walks away with the same amount of money whether he helped you with the closing costs or not.

Who Can Help You With the Down Payment?

What if you truly cannot come up with the down payment? Who can help you? While it’s not the seller – anyone that isn’t involved in the transaction, such as the real estate agent, can help you. Typically, this means family members. They can give you gift money, but this gift money is different than the gifts you receive on your birthday.

Lenders need to trace the origination of the gift money. In other words, they need to make sure that it’s not a loan somewhere down the road. They will need a gift letter from the donor, stating that the money is a gift, the purpose of the gift, and that it doesn’t need to be repaid. The donor must include your name and the address the money is meant to help purchase. The donor must then sign and date the letter.

The donor will also have to provide proof of the funds’ origination. Typically, lenders require only 2 months of bank statements to show that the donor has possession of the money. If there are any large deposits that don’t coincide with the donor’s income, the lender may need further proof of the funds’ origination to make sure there isn’t a loan hidden down the line somewhere.

The bottom line is that the seller can help you, but not with the down payment. If you need help with your down payment, you’ll need either a no down payment loan program, such as the VA or USDA loan, or you’ll need to receive the funds as a gift from a family member.

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Can Closing Costs be Financed?

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Closing costs can cost as much as 5% of your loan amount. If you have a $200,000 loan, that’s another $10,000 you must come up with to close the loan. What if you don’t have it? Can closing costs be rolled into a mortgage?

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It depends. If you are purchasing a home, you may have a tougher time rolling your closing costs into the loan. If you are refinancing your mortgage, you may be able to roll the closing costs into the loan if you have room in the home’s equity.

Does it make sense to do so though?

What’s Your Home’s Value?

The determining factor regarding whether you can roll your closing costs into your loan is the appraised value. Next is the purchase price or the current balance on your existing mortgage, depending if you are purchasing or refinancing.

You can’t borrow more than the home’s value. In most cases, you can’t borrow more than a specific percentage of the home’s value. For example, FHA loans allow you to borrow up to 96.5% of the home’s value and conventional loans allow up to a 95% LTV. If you only put down the minimum down payment, you won’t have room to roll closing costs into your loan on a purchase – this is typical.

If you refinance your loan, though, you may have room. Let’s say your home is worth $300,000 and your existing loan has a balance of $250,000. If you don’t have the cash to pay the closing costs upfront, you may be eligible to roll them into your loan amount since your LTV would only be 83%.

How Long Will You be in the Home?

The next thing to consider is how long you’ll be in the home. Is this your forever home? If so, you may not want to roll the closing costs into your loan for one reason – interest. If you increase your loan amount to cover the closing costs, you pay more interest on the loan itself. If you stretch this out over a 30-year term, you could be paying thousands more than what the closing costs actually cost at the closing.

If you won’t be in the home for the long-term, rolling the closing costs into your loan may not be a bad idea. Let’s say you plan to stay in the home for five years. That means you’ll pay just a small portion of the closing costs, plus the interest on the loan for 60 months. You’ll still have cash in your pocket from the money you didn’t put out upfront for the closing costs and you won’t pay thousands of dollars in interest.

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What are Your Other Options?

If you decide that paying thousands of dollars in interest isn’t worth it or you don’t qualify to roll the closing costs into your loan, you have a few other options.

First, you can ask the lender for a ‘no closing cost loan.’ While the name suggests that there aren’t any closing costs, the lender actually pays them for you. No, they don’t do this out of the goodness of their own heart, though. They increase your interest rate in exchange for the lack of closing costs. Typically, it costs you an extra 0.5% in your interest rate to get the lender to cover your closing costs.

You can also ask the seller for assistance. Sellers are able to contribute between 3% and 9% of the purchase price of the home to help you with closing costs. FHA and USDA loans allow up to 6% and conventional loans allow between 3% and 9% depending on the amount of your down payment. Just like wrapping the closing costs into your loan, sellers typically increase the price of the home in order to make enough profit while helping you with the closing costs. It can be a viable alternative when a lender won’t allow you to wrap the costs into your loan, though.

The answer to ‘can closing costs be rolled into a mortgage’ is that you must look at the big picture first. If you are buying a home, your better option may be seller-paid closing costs as there may be more room for opportunity there. The largest factor standing between you and help with your closing costs is the value of the home, though. If there isn’t enough value to inflate your loan amount, then you’ll have to resort to paying the costs yourself or asking friends/relatives for gift money to help you with the costs.

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Buying an Old House? Pay Close Attention to these Issues

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Buying a house can be exciting and complicated at the same time, but buying an old house can be even more complicated. Before you dive into that rare find, make sure to consider the following factors.

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It May be Built With Hazardous Materials

Older homes were built with older materials, many of which are hazardous. Asbestos and lead paint are the two most common hazardous materials found in older homes.

Asbestos was commonly used in insulation and fireproofing material and lead paint was commonly used in all homes prior to 1978. It’s important to pay for an inspection that will determine if either of these issues exists.

Lead paint is toxic, especially for children. Experts also believe that asbestos causes lung cancer and other serious respiratory issues. Give careful consideration to the purchase of an older home that has either of these issues. If you do still want to buy the home, you’ll need either issue cared for by a professional that knows how to effectively fix the issue without putting anyone’s health at risk.

There May be Mold or Mildew Growth

Cracks, leaks, and faulty building materials all lead to water dripping into a home. If not caught and if the environment is just right, mold and mildew can grow in the home. They are most common in basements and attics where it’s dark and moist, but mold and mildew can grow anywhere including inside windows, in bathrooms, and anywhere else in the home that water leaks.

If the mold and mildew growth is excessive, it’s best to hire professionals to remove it. Trying to remove it yourself could be time-consuming and risky for your health. The professionals know how to protect themselves as well as everything else in the home to avoid spreading the mold spores.

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The Roof May be Historic

It’s common to check the integrity of a roof when you buy a home, but you may be dealing with a different problem when buying an old home. Roofing on some homes has a historic grade. This means you may have to get approval before restoring it and you may have to use certain materials according to the guidelines.

There May be Electrical Issues

Electrical systems in old homes are often as old as the home. This means they probably won’t meet today’s fire code and could pose a serious hazard. Before you assume the home has proper wiring and can handle the electrical needs that you have, make sure to have it inspected.

While having the home rewired can be an expensive investment, consider it an investment in your safety. Faulty wiring can be a serious fire hazard, which can put your home and your own lives at risk.

The HVAC Systems May be Inefficient

If the HVAC systems are as old as the home, chances are they either aren’t working or aren’t efficient. Most older homes didn’t have air conditioning, so pay attention to that important detail. While the home probably has a furnace, there’s no guarantee that it’s in good working condition or that it too isn’t a fire hazard. Having the inspector thoroughly inspect the HVAC systems can help you ensure your safety.

You May Not be Able to Make Major Renovations

If the home is in a historic district, you may be limited on the changes you can make to it. Even if the home isn’t in a historic district, there may still be limitations from the building and planning department of your city. Knowing ahead of time what you can and cannot do can help you make the right decision.

Buying an old home comes with its own issues. While you should always pay for an inspection when buying a home, you want to find an inspector that is experienced in dealing with old homes. This way you know he or she inspects every nook and cranny of the home and gives you a thorough report in order for you to make a decision.

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