You want to buy your own home or perhaps you’re a move up buyer looking to climb the property ladder and purchase a larger home. But there’s just one problem: You don’t have the cash for a 20% down payment. What should you do?
First, let’s assess your current situation: Are you a first-time homebuyer? Or do you own a home? If you’re already a homeowner, you might be in a better position than you realize.
While you might not have the $40,000 sitting in a bank account to cover the 20% down payment on a $200,000 home, but you do likely have equity in your existing home.
When you sell that home, you can use the equity towards the purchase of your next home. The key is to write an offer that’s contingent on the sale of your current home. This is a common contingency, and your real estate agent can include this in your purchase contract. And because this type of contingency is so popular, the seller shouldn’t balk, unless you’re in a hyper-competitive market.
But what if you’re underwater on your current mortgage — or a first-time homebuyer? Read on.
1. Apply for an FHA loan
The Federal Housing Administration, or FHA, insures loans for qualified first-time home buyers. These are known as FHA loans.
The FHA itself doesn’t issue the loan. Rather, a financial institution such as a bank or credit union issues the loan, which is then insured by the FHA. This protects the lender from loss. Because the lender carries less risk, it can offer the loan at rock-bottom interest rates.
The result: You get a mortgage loan at a low interest rate with as little as 3.5% down.
However, there are two drawbacks or limitations to taking out an FHA loan.
First, you’re only qualified to spend 31% of your gross monthly income on all housing-related expenses, including your mortgage, property taxes, insurance, plus any homeowner’s association fees. In other words: If you gross $5,000 per month, you can spend no more than $1,550 per month on housing.
Of course, that’s not entirely a “drawback.” Yes, it’s a limitation. But it’s a limit that will prevent you from tackling a mortgage that you can’t afford.
Second, you’ll be required to pay private mortgage insurance, or PMI, until you reach 20% equity. Despite what you may have FHA PMI is not permanent. The rates vary, but as a rough ballpark, expect to pay an additional $40 to $50 per month on every $100,000 of mortgage that you carry. This will be lumped into your 31 percent limitation. For more on this topic see Using a FHA Mortgage to Buy a Home.
2. Look to city programs
Ohio offers down-payment assistance to its residents. For example, one program offers assistance equal to 2.5% of your home’s purchase price in the form of an interest-free second mortgage to buyers who qualify and complete a free homebuyer education course.
Some of these programs mandate that you must be a first-time homebuyer; others don’t. Some programs are capped at certain income limits; others aren’t. Research the city, county and state programs in your local area to find out the details of what’s in your neighborhood.
3. Get a VA loan
Qualified military veterans can obtain a mortgage with zero down payment, thanks to a program administered by the Department of Veterans Affairs.
Like an FHA loan, a VA loan is a federally insured loan that’s issued by a traditional financial institution, such as a bank. VA loans are given to veterans who maintain good credit, meet income requirements and have a “certificate of eligibility” through the VA.
These loans don’t require any down payment, and as an extra bonus, the buyers don’t need to pay PMI, either — making them an even better deal than FHA loans. Furthermore, the VA restricts the amount that the lender can charge for closing costs, which means you’ll have built-in protection from getting ripped off by ancillary fees.
4. Apply for a USDA loan
Not an urban-dweller? You may be able to take out a loan that’s insured by the Department of Agriculture. These USDA loans are designed to encourage homeownership in rural areas.
To qualify for a USDA loan, your income can’t be more than 115 percent of the median income within the area in which you reside.
Like the VA loan, USDA loans allow you to purchase a home with zero down payment. However, unlike the VA loan, you will need to pay monthly PMI.
There are two drawbacks. First, the USDA only approves certain houses, which means your pool of potential new dwellings will be limited. If you have your heart set on a specific house, and it’s not USDA-qualified, you won’t be able to use this loan to buy that particular abode.
Second, you’ll be limited to spending no more than 29% of your gross income on all housing-related costs (including PMI) and no more than 41% of your gross income on all of your combined debt payments, including your mortgage, car payments, student loans and more.
The bottom line
Don’t have a 20 percent down payment? Don’t sweat. Regardless of whether you’re a city-slicker or a country-dweller, a first-time homebuyer or a military veteran, there are plenty of options you can explore.
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please give us a call and we’d be happy to assist you!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Downtown Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Galena 43021 Hilliard 43026 Lewis Center 43035 New Albany 43054 Pickeringto, 43147 Polaris Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235