So, you want to buy a home? Not a house, but a home—somewhere for you to live, put down roots, and watch your children grow up, at least for a time. You’ve done your research, and after looking at the advantages and risks of buying a home, you’ve decided to jump into the market and try (Source Investopedia). Now you’ve got a wealth of options and directions to choose from: which mortgage company to work through, which home to buy, what type of loan to get, and so forth. One big question that will come up on every loan is the requisite down payment and whether or not you will want to use down payment assistance.
To determine whether or not down payment assistance is right for you, it’s wise to do some research. According to NerdWallet, a good start is to learn the different types of down payment assistance that are commonly available, such as grants, forgivable loans, and deferred payment loans. It’s also good to research what down payment assistance options are available to you where you live, and how to access them. Some cities or counties may offer down payment assistance, and most states have a housing agency that does as well. There are also competitive national programs that you should consider. CBC Mortgage Agency’s Chenoa Fund down payment assistance program is offered in every state except for the State of New York, and you can apply for down payment assistance as long as your mortgage lender is approved to offer the program.
Here are a few other questions to consider when determining whether or not down payment assistance is right for you:
What monthly housing payment can I afford?
The terms of your first mortgage can be impacted if you don’t have your own down payment. It is possible that the interest rate on your first mortgage will be higher than if you provided your own down payment. In addition, there can be a significant difference in the interest you are paying on your first mortgage depending on the down payment program you select. To determine which option makes the most sense for you, you should consider things like how long you think you will be in your new home. For example, if you qualify for a forgivable second mortgage, but you plan to be in your home more than 5-7 years, the additional interest you are charged on your first mortgage may exceed the amount of the forgivable second mortgage you are receiving. If this is the case, you may want to opt for a repayable second mortgage that gives you a better interest rate on your first mortgage, or you may want to bring in your own down payment.
Ask your licensed mortgage loan officer what the interest rate on the first mortgage would be if you were to provide your own down payment. If providing your own down payment is not an option, and you qualify for down payment assistance with a forgivable feature, compare the overall costs of this type of mortgage with that of a repayable down payment assistance second mortgage.
Be sure to ask your lender if you qualify for other types of assistance such as a municipal, state of the federal grant.
Can I afford a down payment and closing costs?
The down payment for a home mortgage can be as low as 3% for conventional mortgages, 3.5% for FHA mortgages. Additionally, there are closing costs, which typically range from 2% to 5% of the purchase price, according to Investopedia. So, on average and at a minimum, you could pay out of pocket 5–5.5% of the purchase price of the home to close on a mortgage. Most down payment assistance programs provide at least 3–3.5% assistance, while many also provide 5% assistance. So, it may be possible to pay nothing out of pocket when using down payment assistance; however, keep in mind that avoiding up-front costs now often comes with increased costs over time, such as a slightly higher mortgage payment. But for borrowers who can afford the mortgage payment (but may not have much cash on hand) this can be an attractive option.
What do my savings look like?
As mentioned above, some borrowers have a steady enough income to afford a monthly mortgage payment, especially if they’ve done the research and discovered that a mortgage payment can be equal to or less than their current rent payment. Some of these borrowers, however, don’t have the cash on hand to afford a down payment today, or even for many years. These types of borrowers may find down payment assistance to be well worth the effort. Other borrowers can afford a down payment, but doing so may wipe out their savings. These borrowers may appreciate utilizing a down payment assistance program and being able to hold on to their savings, retaining it for a rainy day, or house repairs, or even home furniture. Whatever your personal situation, don’t forget to think about what your bank account will look like the day you move into your home, in addition to six months or several years down the road.
How does rent versus a mortgage payment compare in my area?
In some markets, rent is rising quickly, while fixed-rate monthly principal and interest mortgage payments remain constant over time (although taxes and insurance payments, which are often escrowed into the monthly payment amount do fluctuate). Other markets may have lower rent payments than monthly mortgage payments. If you’re in the former market, you may find that your monthly expenses actually decrease with the purchase of a home, even with down payment assistance; in the latter market, it may increase your expenses to purchase a home, although you will have the knowledge that your monthly payments may be helping you work toward equity growth in the home you own, not someone else’s home. Which option is better depends on where you live, your financial situation, and your family and financial goals.
What’s my credit situation?
Borrowers with credit scores lower than 670 are considered to have “Fair” scores, according to Experian. While scores in this range are enough to qualify for a mortgage, lower credit scores tend to be paired with higher costs, such as higher interest rates or closing costs. When heading down the home buying path, be sure to keep a watchful eye on your credit. Check your credit report for free at least once a year at annualcreditreport.com. Review your credit for errors and dispute the errors in writing with the reporting agency. Pay your bills on time and keep revolving credit card usage to a minimum.
What’s my income situation?
It’s hard to get a home mortgage if you’re between jobs because it’s difficult to prove that you’d be able to make a monthly mortgage payment. Be sure you are secure in your income and employment before considering purchasing a home.
How long do I plan to live in my home?
Homes tend to increase in value over time—with an emphasis on “over time,” as it takes the average homeowner about five years (Source Investopedia) to recover the initial investment of purchasing a home and begin to build equity. In addition, many down payment assistance programs place some sort of limitation on selling or refinancing a home within one to three years. As a result, buying a home, especially with down payment assistance, should be viewed as a long-term investment, while borrowers that may move just a few years after buying a home should carefully review the costs of purchasing a new home before moving forward.
In the end, it’s best to do your research and take into consideration your lifestyle, income and monthly expenses to help determine whether or not the time is right to buy a home and whether or not you need, or would like to obtain down payment assistance.