Down Payment Assistance Programs

What are the Requirements for First-Time Home Buyer Programs?

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Many loan programs are only for a first-time homebuyer. Does that mean only those that have never owned a home? It may shock you to hear that the answer is ‘no.’ There are other stipulations that can make you a first-time homebuyer and therefore eligible for a variety of great programs.

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The True First-Time Homebuyer

Of course, the true first-time homebuyer is the person that never owned a home before. Maybe you rented or you lived with your parents. Whatever the case may be, you never signed on the dotted line on a mortgage.

First-time homebuyers typically have a hard time coming up with a large down payment. Because they don’t have a home with equity to sell, they have to rely on their savings. This is why many programs cater to the ‘true’ first-time homebuyer because they need help with the down payment.

The ‘Other’ First-Time Homebuyer

There are first-time homebuyers that have owned a home before. It sounds strange, but it’s the homeowners that owned a home before and now they don’t. Typically, you have to be without a home that you own for three years in order for loan programs to consider you a first-time homebuyer again.’

The borrowers that typically fit this mold are those that either sold their home for one reason or another and now rent or those that lost their home in foreclosure. Whatever the case may be, if you don’t have a home now and you haven’t owned one for three years, you may qualify for the first-time homebuyer benefits.

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Divorced First-Time Homebuyers

If you were married before but aren’t now, you may qualify as a first-time homebuyer. Here’s how. Did your spouse own the home before you got married? Or did your spouse buy the home in his name only even after you were married? If you didn’t sign your name on the dotted line on the mortgage, you may qualify as a first-time homebuyer.

Qualifying for Loan Programs as a First-Time Homebuyer

Before you start applying for loan programs, whether you are a first-time homebuyer or not, you should know how to maximize your chances of approval:

  • Maximize your credit score – Government-backed loan programs have low credit score requirements, but that doesn’t mean you shouldn’t try to increase your score. The higher the credit score you offer a lender, the better terms you’ll get. Try to achieve the highest score possible so that you can obtain those great terms.
  • Save as much money as you can – You’ll need some type of down payment unless you qualify for VA or USDA financing. The more money that you have to put down on the home, the better your chances of approval becomes. Even if you don’t put all of the money you saved down on the home, it puts you in a good light with the lender if you have reserves on hand.
  • Keep your debts down – Lenders don’t like you to have other debts. You need to try to pay off as many debts as possible. This way your income compared to your debts is low enough for lenders to feel comfortable giving you a new mortgage.
  • Have stable employment/income – You may not need a 2-year history at the same job anymore, but any consistency that you can show a lender, the better your chances of approval become. Lenders want to see that you are at least working in the same industry and have income that is either stable or rising over the years.

First-time homebuyers have many loan options available to them. If you want to apply for special programs or grants for first-time homebuyers, you’ll need to be an actual first-time buyer or one that hasn’t owned a home in at least three years. If you don’t qualify as the first-time buyer, there are plenty of other government-backed and conventional loan programs that you can use as well.

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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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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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Pros and Cons of a Small Down Payment on a House

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Did you know that you don’t have to put 20% down on a home to get financing? Today many programs allow down payments as low as 3% and there are even programs that don’t require a down payment at all.

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While this sounds ideal, it may not be the best for everyone. Keep reading to learn the pros and cons of making a small down payment on a home.

The Benefits of a Small Down Payment

First, we’ll start with the benefits of a small down payment.

  • You’ll have money in reserves. It’s always a good idea to have money in an emergency fund when you own a home. What if something breaks as soon as you move in or you realize that you need to buy a specific appliance? If you don’t have the funds, it can put you in a dire financial situation right away. Instead, you can have the money sitting in your savings account for that rainy day.
  • Makes it easier to buy a home – If you can find a loan program, such as the FHA or even a conventional loan that requires a low down payment, you may be able to buy a home sooner than you thought. If you are forced to wait until you have a 20% down payment, on the other hand, it can take longer.
  • You increase your rate of return – When you put less down on the home, but your home appreciates, you are able to earn a higher rate of return. The more money you put into the home, the less you make in equity; you are just making back what you put into the home.

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The Downsides of a Small Down Payment

Of course, there are downsides to a small down payment.

  • You’ll have little equity – If you ever want to access the home’s equity to make improvements to the home or even pay for another large expense, you won’t’ have any for quite a while. Gaining equity in the home with a small down payment can take many years.
  • You’ll pay mortgage insurance – Whether you opt for a conventional loan or a government-backed loan, you will pay mortgage insurance on the loan. If you take an FHA or USDA loan, you will pay mortgage insurance for the life of the loan. Conventional loans only require it until you owe less than 80% of the home’s value.
  • You’ll pay a higher interest rate and have a higher payment – The less money you put down on a home upfront, the more your payment will cost you. Lenders typically charge higher interest rates because of the higher risk of default. Your payment will then be higher but even with the same interest rate, your payment will be higher because of the higher amount of your principal balance.
  • It’s tougher to win the bid on the home – If you are trying to buy a home in a competitive market, sellers may favor the buyers that put more money down on the home. A higher down payment often means an easier time getting financing, which is what the seller wants as they don’t want to lose the offer that they accept.

It’s a Personal Decision

Each situation is different when it comes to making a down payment. Sometimes a large down payment is good, especially if you will stay in the home for the long-term and you have reserves set aside on top of the down payment. If you aren’t sure about your longevity in the home or you worry about your financing future, though, making the smaller down payment may be the better option.

You have to weight the pros and cons of each side. It helps if you talk to a few lenders and even your tax advisor to see which option will suit you the most in the long run. It’s not an easy decision to make and it’s not a decision you should rush into. Instead, take your time and decide which option is right for you.

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The Essentials New Homeowners Must Buy

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Before you close on your new home purchase, you should know the things you need to buy once you get into your home. All too often, new homeowners focus on the closing costs and down payment, not realizing the vast number of items they need to buy once they are in the home.

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So what do you need to buy when you move into your new home? Check out our list of essentials below so that you can best prepare yourself financially for your new home purchase.

New Locks

Whether you buy an existing home or a newly constructed home, you’ll want to change the locks. You don’t know who has keys to the existing locks and it’s not worth taking a chance. New locks and keys are fairly affordable, especially if you go to your local hardware store, but you can also call a professional locksmith to come take care of it for you.

Yard Tools

If you lived in a condo, townhome or apartment before, you probably don’t own lawn tools. At the very least, you’ll need a lawnmower and weed whacker. If you live in an area that it gets cold and snows, you’ll also need a shovel and/or a snow blower. Depending on your level of gardening, you may want to stock up gardening tools too.

A Basic Toolbox

As a new homeowner, you’ll need tools to make basic repairs. Even if you aren’t super handy, there will be a time you’ll want a hammer, screw driver, and wrench. Head to your local hardware store and ask about basic toolboxes – many stores have ready-made tool boxes for people starting out just like you.

Security System

Even if you live in the most affluent area, a security system may be necessary. Not only does it protect your house, but it may give you a sense of peace. Even a basic security system can deter a burglar for fear of being caught.

Smoke Detectors

Don’t rely on the effectiveness of the existing smoke detectors or even carbon monoxide detectors. Consider replacing all of them when you move into the home, unless it’s new construction. Also, make sure there is enough smoke detectors throughout the house. If there isn’t one in every bedroom and strategically placed throughout the first level, add more in order to enhance your level of safety in the home.

Window Coverings

Unless the previous homeowner left all of the window coverings, you may find the home quite open when you walk into as a homeowner. While you can buy temporary (paper) blinds from the local hardware store, they are temporary. Eventually you’ll want ‘real’ window treatments whether blinds, shades or curtains. At the very least, find window coverings for the most prominent windows, such as bedroom windows or any windows on the first floor that give
passerby a full view of your home.

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Cleaning Essentials

Whether you buy a new or used house, trust us, it will need a good cleaning. Even if someone cleaned it for you, there are certain things you’ll just want to clean yourself, not to mention the fact that you’ll need the cleaning supplies moving forward. Stock up on the essentials such as a broom, mop, and vacuum. You may also want a carpet cleaner, duster, large bucket, and plenty of cleaners including a general disinfectant.

Appliances

Make sure you know if the seller will leave any appliances for you. If not, think about the essentials that you need including:

  • Microwave
  • Stove
  • Oven
  • Refrigerator
  • Freezer
  • Washer
  • Dryer

You may also need smaller things, like light fixtures and fans. You’ll have a good idea of what you need after you sign the purchase contract and find out what the seller will or will not be leaving for you.

Miscellaneous Items

If this is your first house, you may also need essentials, such as:

  • Ladder
  • Step stool
  • Garden hose
  • New bedding
  • Furniture
  • Towels
  • Throw rugs
  • Fire extinguisher

New homeowners have plenty of items they need/want to buy after moving into a home. Keep these expenses in mind as you set your budget. Don’t make the mistake of spending all of your money on the closing costs and down payment,, leaving yourself with nothing to spend on the essentials you need once you actually become a homeowner.

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What Documents do you Need for Mortgage Pre-Approval?

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Obtaining a mortgage pre-approval is one of the most important things you can do before shopping for a home. Without it, how do you know how much house you can afford? Do you like shopping outside of your budget? Probably not, which is why you need to take this step.

We recommend getting quotes and possibly an approval from at least three lenders. This way you have a better idea of what you can afford and at what terms. Below we will discuss the documents you’ll need to provide the lender in order to get the answer you need.

Personal Identifying Information

First, you’ll need to provide your personal identifying information. This means your name, address, birthdate, and social security number. If you have lived at your current address for less than two years, you’ll also need your previous address that covers a span of two years.

The lender will ask you to sign a mortgage application as well as a document that allows them to pull your credit. They need to know your credit score and/or credit history in order to pair you up with the right loan. Without this information, your approval would really just be a guesstimate.

Income Documents

Next, you’ll need income documents. What you need to provide may vary depending on your type of employment. For example, the self-employed borrower will need many more documents than the employee that receives a salary.

If you are a salaried employee, you’ll need:

  • Paystubs – You’ll need to cover the last month of your employment. If you get paid monthly, you need one paystub (some lenders may require another). If you are paid bi-weekly, you’ll need two paystubs and weekly, you’ll need four.
  • W-2s – You’ll need to dig up the last two years of W-2s from all of your jobs during that time. If it’s the beginning of the year and you have not filed the prior year’s taxes yet, you can provide the most recent W-2s you have.

If you are self-employed, you’ll need:

  • 1099 forms – If you are a contractor or received 1099s for any work you did, you’ll need to provide any you received over the last 2 years
  • Taxes – You’ll need to provide the last 2 years of tax returns including all schedules. If you filed business taxes, you’ll need to provide them with all of their schedules as well.
  • Year-to-date Profit and Loss Statement – The lender needs to see how you are faring so far this year. They will compare the P&L to the income reported on your taxes to see if you are on track to earn the same amount of money this year
  • Leases – If your income is real estate focused, you’ll also need to provide the signed and executed leases for any properties you own/rent.

Asset Documents

If you’ll be putting money down on the home or paying closing costs, you’ll need to prove you have the assets available. The lender will need:

  • Bank statements – Lenders usually need 2 months’ worth of bank statements. This lets them see your pattern of deposits as well as look for any unseasoned funds. Any new large deposits that don’t coincide with your income could require further evaluation to make sure they are not a loan.
  • Investment statements – If you’ll use any of your investment money for the down payment or closing costs, you’ll need two months of these statements as well.

If you’ll receive a gift for a portion of the down payment or closing costs, you’ll also need a Gift Letter from the donor. This letter should document the amount of the gift, the reason, and the fact that it is a gift and not a loan.

Purchase Contract

If you happen to have a purchase contract already, you can supply this to your lender. However, it’s best if you do this process before you shop for a home. This way you have a better chance of winning a bidding war and/or just winning the seller’s trust. If the seller can’t confirm that you qualify for financing, they may not accept your bid on the home. If you are lucky enough to find a willing seller to accept your bid without the pre-approval, you’ll need to supply the contract to the lender.

The lender will go over each of these documents and determine how much they may lend you. Notice, we said may lend. This doesn’t mean it’s any type of guarantee. This letter is usually good for a few months. If you don’t find a home within that time, you’ll have to reapply.

Even if you do find a home within that time, you’ll have to meet the conditions the lender states in the pre-approval letter. You may need to supply updated financial documents if too much time passes and you’ll definitely have to find a property that meets the lender’s requirements.

Overall, though getting pre-approved gives you the advantage when it comes to shopping for a home. You’ll know ahead of time what conditions you’ll need to satisfy and how much money you can afford to borrow. It’s a win-win for everyone even if it takes you a little extra time.