Saturday, May 26, 2018
Fact or Fiction? 6 Down Payment Myths You Should Stop Believing Immediately
| Apr 26, 2018
If you're thinking about buying your first home, that pesky down payment has probably kept you awake more than a few nights. We get it—while a pre-approval is crucial for determining your buying power, it's the down payment that shows you mean business.
But saving up is hard. In a study conducted by NerdWallet, 44% of respondents said a lack of a down payment was the roadblock keeping them from buying a home.
Making things even worse? Your well-meaning friends and family have probably given you at least one piece of well-meaning, but ill-informed advice, leaving you in more of a blind panic than you need to be.
We're not saying that saving for a down payment will be a cake walk, but separating fact from fiction can go a long way. Here's the truth you need to know.
Myth No. 1: You need 20% down
In the NerdWallet study, 44% of respondents also believed you need 20% (or more) down to buy a home. For decades, this was standard, but it isn’t always the case anymore.
“It really depends on the type of buyer you are,” says Robert Garay, a broker associate and team leader of the Garay Groupat Lifestyle International Realty in Miami.
For instance, a Federal Housing Administration (FHA) loan only requires 3.5% down. If either you or your spouse served in the military, you're likely to be eligible for a Veterans Affairs (VA) loan, which can be approved for 0% down. The same goes for United States Department of Agriculture (USDA) loans.
And if you're a qualified buyer, you can get approved for a conventional loan with less than 20% down, but there’s a catch: You’ll be on the hook for private mortgage insurance, or PMI. PMI is paid directly to your lender, not toward your principal. Think of it essentially as insurance you pay to prove to the lender you won’t default on your loan.
Myth No. 2: Paying mortgage insurance is smarter than paying a bigger down payment
Perhaps that mortgage insurance seems like a small price to pay in order not to deplete your bank account and win the house. So what if you make some additional payments for a while?
It might not be a big deal, but you’ll want to calculate what you'll pay in the long run. Take, for example, conventional loans. If you put less than 20% down, you'll get stuck with PMI, but only until the principal balance reaches 78% or less of the original purchase price.
FHA loans, on the other hand, require mortgage insurance for the life of the loan. That means you'll be paying an extra monthly fee for as long as you live in the home (or until you pay off the mortgage).
Before you brush off mortgage insurance, compare your options—and know that paying less upfront could mean paying much more over the life of your loan.
Myth No. 3: Cash is king
If you're shopping in a competitive market, you've likely heard horror stories about first-time buyers getting snubbed over investors or all-cash buyers. If you're working with a loan and a small amount down, it might seem like your chances of getting picked over the other guys are slim to none.
There is some truth to this belief. Cash offers offer one big benefit to a seller: They're guaranteed to close on time with no loan approval hiccups.
But on the flip side,“That myth assumes that sellers care most about a fast and certain close, and that’s not always true,” says Casey Fleming, mortgage adviser and author of "The Loan Guide: How to Get the Best Possible Mortgage."
Often, if you make the bigger offer, or you write a killer personal letter that resonates with the seller, you stand a better chance of getting approved over an all-cash offer.
Fleming’s seen it happen: “I’ve actually beat out all cash offers with 10% down because our offer price was a little higher,” he says. “I’ve also had deals where we were competing against a higher cash offer and the seller took ours because the buyers were a young family wanting to raise their kids in the home—and that meant something to the seller.”
Myth No. 4: Down payment assistance is easy!
We hate to burst your bubble—or discourage you from trying to get down payment assistance if you qualify—but finding, applying, and getting approved for help isn’t always easy.
First, there are no national, or even many state-run, assistance programs.
“Pretty much every program is locally run, sometimes by county or even by city,” Fleming says. You can check the Department of Housing and Urban Development's website for a smattering of state-run "homeowner assistance" options, but you'll have to do some digging.
And then there’s the other rub. “You have to be under a certain income to qualify, usually the median income in the county,” Fleming says.
Some programs may make special exceptions—say, for single parents—but in general, income is going to be a big factor.
For example, to be eligible for down payment assistance in Grand County, CO, applicants must work a minimum of 32 hours per week in the area and meet income limits. Nevada's "Home Is Possible Down Payment Assistance Program" has a cap on income, credit score requirements, and the cost of the home bought. In Tamarac, FL, applicants must meet income requirements, wait until an open enrollment period and then get picked from a lottery system.
Still, if you think you might qualify, call your local housing authority office—it can usually point you in the right direction.
Myth No. 5: You shouldn't put more than 20% down
Let's say you're lucky enough to have saved more than 20% down. Odds are good some well-meaning friend is going to tell you to put only 20% down—no more, no less. After all, now that you've successfully avoided PMI, why fork over more cash than you have to?
A couple of reasons, Fleming says: First, a higher down payment could signal to your lender that you're a trustworthy borrower and get you a lower interest rate on your mortgage. Plus, the more you pay upfront, the less you're borrowing—which means lower mortgage payments.
But you'll have to put down at least 5% more to see that difference, according to Fleming.
"Your interest rate drops a little more with 25% down, and even more with 35% down," he says.
Compare your options to see if it makes more sense to pay the extra down or to keep that money in investments that can work for you.
Myth No. 6: You can take out a loan for a down payment
Truth: There's nothing wrong with getting help with your down payment, but it has to be a gift. If a lender suspects the money might be a loan, repaying said loan will be factored into your mortgage approval amount and you’ll qualify for less than you might have wanted.
In order to prove it's a gift, you’ll have to get a letter from the gifters, swearing that they don’t plan on asking for the money back. And don't try to game the system—lying on a mortgage application is a felony.
Dori Zinn contributed to this article.
For more smart financial news and advice, head over to MarketWatch.
Can Bringing Kids to an Open House Botch a Buyer's Chances? Experts Weigh In
| May 21, 2018
A few years ago, while selling our home in New Jersey, a real estate agent requested a showing for a couple and their tween daughter.
"Of course!" my husband and I thought. We didn't even think: What could go wrong?
But we should have, because here's what did:
Apparently, the tween found touring our house a drag. And so, while her parents ostensibly talked about the yard or our built-in bookshelves, she sneaked upstairs to my closed-off home office. She then proceeded to turn on my laptop, rename, and rearrange a half-dozen work files, and ... try to log in to Netflix to watch a movie.
My husband and I are not what you would call emotional firecrackers. But this time, we saw red. Who wants a stranger—regardless of age—messing with their personal possessions? No one. Drama and massive apologies ensued (although from the broker, not the tween trespasser).
My husband and I decided that if this family dared to put in an offer, we would refuse it on principle.
Whether you, too, have an adorable moppet or a rebellious tween, you might have wondered how your kids—and the impression they make—might affect your chances at landing your dream home.
Unfortunately, there’s no hard and fast answer here—you know your family best. (That said, keep them away from strangers' computers.) But read on for what real estate pros think about your touring a house with your kids in tow.
Your kids could distract you from the mission at hand
Alex Hubler understands that every family’s schedule and resources are different.
“But my general rule of thumb is, no kids on first showings,” says Hubler, an agent with Keller Williams Premier Realty Lake Minnetonka, in the Greater Twin Cities area. “All decision-makers need to come with their undivided attention.”
Most of the time kids are involved, Hubler says, “one of the parents is in charge of keeping them on good behavior and wrangling them, if need be. That takes their focus away from evaluating the home objectively.”
What parents should know: If you do bring your children to the first showing—and you think you kind of like the house—ask the agent to show you the place again ... alone.
Your kids shouldn't get the final say
Julie Gans, an agent with Triplemint Real Estate, in New York City, remembers what happened when she showed an apartment to a single mom.
"Her son was 14 years old, and he was the decision-maker in the family," Gans says. "It was a $5 million apartment—and she was letting her son make the decision if he was 'comfortable' in it."
What parents should know: Of course, you want your kids to feel at ease in the home you ultimately choose, but that shouldn't mean they get final say. After all, who will be paying the mortgage? As much as you can, keep them out of the process. Bring them through on a second showing. Or heck, hold out until the home inspection.
If you must bring the kids, bring help, too
Gans has hosted many open houses where well-behaved children pop in with their parents, politely sit, and read a book or quietly play on an iPad.
“But I have had many open houses with poorly behaved children,” she admits. “The parents view the apartment, and I end up being the baby sitter.”
That can be a high-stress situation when there are, say, windows that aren't childproof or priceless antiques that most definitely aren’t playthings.
What parents should know: If you can, bring a sitter, family member, or friend to watch your kiddos.
Why does it matter, especially if the seller isn't around? Well, if they misbehave and the listing agent is there, you'd better beware.
“It is really up to the discretion of the broker to relay the information to the seller,” Gans says.
And if a bidding war ensues, that info could weigh against you in the seller's decision.
Well-behaved kids could get a pass
By now it probably sounds like the jury has ruled against bringing kids along for a showing. But it isn't always a bad thing. Sometimes, it can even help facilitate a sale.
“There's nothing I like better at an open house than having a family with well-behaved kids,” says Aaron Bowman, a real estate professional with Mazz Real Estate, in Tolland, CT. “That way, I can connect with the whole family.”
Bowman enjoys going into detail about what his own kids like about the home he's showing. And sometimes, he even brings his own older kids with him to open houses. (And yes, they are well-behaved.)
What parents need to know: If you have a child you trust to respect the house you're touring, go for it.
"Having kids at open houses only becomes an issue when it takes away from other potential clients’ viewing," Bowman says.
Kids or no kids—some sellers consider only the bottom line
“Whether or not a customer has brought their children to an open house has no bearing on whether or not their offer is accepted,” says Eric D. Rosen, a licensed associate real estate broker with Halstead Property, in New York City.
Instead, he assures, it all comes down to the numbers: Which client presents the best offer to the seller, the amount of the offer, cash or financing, closing date, and more.
What parents need to know: Even if you have the next Honey Boo Boo in tow, “this is a business transaction in the end,” Rosen says.
Are You Ready to Graduate From Renting to Owning a Home?
| May 15, 2018
With graduation season in full swing, many may be pondering a change in their living quarters. Some may be moving out of Mom and Dad's house into dorms, or maybe out of dorms into their own apartments.
But what if you're ready to take an even bigger step—moving out of a rental into a home you can call your own?
Buying a house, after all, is a great way to put down roots and build wealth (since homes tend to appreciate so you can sell later for a profit). But purchasing property isn't a simple process, so you should make sure you're prepared.
So, how do you know if you’re ready to move from an apartment to a house? Ask yourself these questions below to get a sense of where you're at—or what you have to do to transition easily into home-buying mode once the time is right.
Can you afford to buy a home?
For starters, let's talk money. Buying a home is a hefty purchase, probably the largest you'll ever make. So, you'll need a down payment (typically recommended to be 20% of the home’s purchase price) and steady income (i.e., a job) to pay your mortgage.
There are other costs also associated with homeownership:
- Closing costs (typically 2% to 5% of the home's purchase price)
- Home insurance (cost varies by state)
- Maintenance
- Utilities
- Budget for unseen repairs and emergencies
While renting might seem more economical than owning at first glance, that’s not always the case; our rent vs. buy calculator can help you compare the costs. You might be surprised by the results!
Another good first step to figuring out whether you can afford a house is to enter your salary and town of residence into a home affordability calculator, which will show you how much you'd pay for a mortgage on a typical house in that area. Or talk with a loan officer about whether you would qualify for a mortgage, and how much you can spend comfortably. Such consultations are free, and will give you a concrete dollars-and-cents sense of where you stand.
Are you settled in your job?
Your job situation is not only important in terms of income to buy a home, but also whether you're happy where you work and plan to stay put. Because once you own a home, your career prospects do narrow somewhat, purely because a home anchors you to one area.
“Homeowners tend to have fewer job opportunities compared to renters, since renters can easily accept a job in another city or state," says Reid Breitman, managing partner at Kuzyk Law, in Los Angeles. "A homeowner may decline such an opportunity because they don’t want to go through the cost, time, and expense of selling their home. So, it may be better to wait to purchase a house until after you're firmly established in your employment situation."
Do you know where you want to live?
Since moving once you own a home is not as easy as just packing your bags (which, let's face it, is a hassle in itself), you really need to make sure you’re picking a home in an area where you’ll be happy.
“It's not easy to just sell a house and move to a new one if intolerable neighborhood issues come up, since the transaction cost to sell—up to 8% to 10% of the sale price for brokerage fees, escrow, title, and other costs of sale—would be relatively very expensive,” Breitman says. “So you need to really scope out the neighborhood.”
When in doubt, try renting for a few months to make sure you like the area before you start shopping for a home to own for good.
How much home maintenance are you willing to tackle?
If you love the challenge of fixing a leaky faucet and figuring out which shrubs will flourish in your yard, homeownership may be right up your alley. But if the idea of mowing a lawn or messing with the HVAC makes you depressed, then you may want to stick with renting, which gives you a roof over your head without the work.
“Apartment renters don’t have many home-related responsibilities,” explains Brian Davis, director of SparkRental, in Baltimore. “If something breaks, they call the landlord. Often, they don’t even need to worry about setting up utilities; they either come with the building, or the process is merely changing the name on an existing utility account.”
Living in a house you own is a different story. There’s no landlord to call if anything goes wrong; it’s all up to you. So you have to be either adept as a handyman, or willing to find and pay someone else to do such tasks. Or else consider buying a condo or co-op, where the lawns and public areas around your home are maintained by hired help.
Bottom line: Owning a home is a big commitment. So before you jump into it, you should have confidence that it works for your circumstances.
“No one should feel like they have to follow a template, that by reaching a certain age or having a certain number of children they need a house in the suburbs,” Davis says. “So forget the clichés and movies, and decide based on you."
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