Most people believe that you have to save 20% to use as a down payment on a home making home ownership feel out of reach. It’s not true! Did you know that you can buy a home with as little as a 3% down payment? There are great programs out there to suit many types of buyers. Most people qualify for more than they think they can afford.
There are also alternatives to simply obtaining a new mortgage. In some cases you can take over an existing loan at the rate of the current owner. Yes, you heard me correctly. This is called an assumable loan. In simple terms, an assumable mortgage allows a buyer to take over the seller's existing mortgage, including its interest rate, repayment period, current principal balance, and other terms, rather than taking on a new loan to finance the property. That means if you buy a home and the current owner has a low interest rate you may be able to assume that loan at the current rate if you qualify.
A good place to start is to take a look at your debt to income ratio. In other words, how much you make vs. how much debt you owe. If you are self-employed it is especially important to speak with a mortgage lender in advance of searching for a home to make sure your ducks are in a row. For instance, if you intentionally increase your expenses to pay fewer taxes you may also have less income to show which will make qualifying for a loan more difficult. A lender will be able to help you put your best foot forward by making sure your return reflects your income in the most positive way.
Another option to reduce your monthly mortgage and thereby make home ownership feel more attainable is to ask the seller for an interest-rate buydown.
It’s a tool to help you qualify for a larger loan and purchase a higher-priced house than you could under normal circumstances. A buydown allows you to pay extra points up front in return for a lower interest rate for the first few years.The good news: the extra points are tax deductible. Often, people relocating for employment obtain buydowns because employers often pay the extra points as part of a relocation package.
Buydowns are a financing technique used to reduce the monthly payment for the borrower during the initial years of the loan. Under some buydown plans, a residential developer, builder or the seller will make subsidy payments (in the form of points) to the lender that "buy down," or lower, the effective interest rate paid by the home buyer.
State agencies often offer lower rate loans. But to qualify, borrowers usually must be a first-time homebuyer and meet income limits based on the median income level of their county.
While the most common way of obtaining a buydown is by paying extra points up front, many mortgage companies now increase the note rate to cover the cost in later years.
How does it work, and are there different types of buydowns?
The most common is the 2-1 buydown, which oftentimes costs 3 additional points above current market points.
It works like this: During the first year of the mortgage, the interest rate is reduced by 2 percent and 1 percent the second year. So if you get a 7 percent interest rate on a 30-year fixed mortgage, you’d pay 5 percent the first year, 6 percent the second year, and 7 percent for the remaining life of the loan.
Another option is the 3-2-1 buydown. This reduces the mortgage rate 3 percent the first year, 2 percent the second and 1 percent the third. Thereafter you pay the full rate.
Some programs are “flex-fixed” buydowns that increase interest at six-month intervals instead of annually.For example, a flex-fixed jumbo buydown might cost you 1.5 points. The first six months, your rate would be 7.5 percent. The next six months would be 8 percent, the next 8.5, then 9 percent
Net…net…you can afford to buy a home with the help of advisors who can help with some creative options. It might not be the Taj Mahal, but it is a step toward a goal. Reach out to me so we can start answering your questions.