How to Minimize the Cash You Need To Buy Your New Home.
If you are like many other first time buyers can afford to pay
your monthly payments but have difficulty to save enough cash to
buy a home, I have good news for you. It is possible to buy a home
with a low 3 to 5% down payment and structure the transaction to
minimize the closing costs and prepaid expenses.
You'll just use a bank's money to help you out buying a home.
A little creativity can often help you to enjoy the freedom and
security of owning your own home and build up equity as your property
increases in value.
Most first-time buyers can qualify for a mortgage loan, but they
may need help from parents to make the down payment or closing costs
on their home. There are loan programs that minimize the down payment
and closing costs for first-time buyers. These programs usually
require that 3 to 5 percent of the purchase price come from the
buyers funds, not from a loan or gift.
Most lenders ask for the last three months' bank records, and the
borrower will be asked to reveal the origin of any large deposits.
If the money comes from the parents, the lender may not consider
those funds when qualifying the buyers.
If you are planning to help your children finance a home, you should
transfer any funds several months before they begin their house-hunting.
If it is a loan, you should draw up a formal re-payment agreement
with your children to eliminate potential misunderstandings between
you, your children, and any siblings.
There are two ways to minimize your closing costs…
First is to ask you lender about "no closing costs mortgage".
Your interest rate will be slightly higher, but the lender will
void their fees and may even issue you a credit towards your lawyer's
fees and a title company. Expect to pay 0.25% increase in your rate
for the cash amount equal to 1% of your loan amount.
Even though you pay a higher interest rate, that interest is tax
deductible. The difference in your monthly payment will be very
small, but the difference in available cash is significant. Another
point to consider is today's interest rates. If rates are low as
today by buying a home you lock your still very low rate. By waiting
the rates may go much higher by the time you'll have all necessary
cash. If rates today had been high you would have a chance and consider
refinancing within 4-5 years anyways.
The second way is to ask the seller to pay a portion of the closing
costs. I can negotiate with a seller to cover some of your closing
costs.
Here's how we can do it...
As a rule, the sellers may pay a maximum of 3 percent of the sales
price if the buyer is putting five percent down. If the buyer is
making a down payment of 10 percent or more, the seller can contribute
up to 6 percent of the sales price to cover the buyer's closing
costs.
Some items must be paid by the buyers, such as prepaid taxes and
the first month's mortgage payment. Sellers may also contribute
to paying the appraisal, points, title insurance, settlement attorney
fees, state or local transfer taxes and similar items. Keep in mind
that if the credit is included in the price of the house, the appraiser
will have to justify the amount, based on sales prices of similar
homes in the neighborhood.
Simply put, the seller is interested in what they will net from
the selling, and they will get their check on the closing. For example
the asking price of the house is $450,000. You are ready to offer
the seller $445,000. Your closing costs and prepaid expenses will
be around let say $7,000. So, we'll offer the seller $452,000 and
will ask them to credit $7,000 toward your closing costs. You exchange
the checks during the closing, so seller nets his $452,000 and pays
your costs of $7,000. It is true, your mortgage amount will be $7,000
higher which may cost you extra $30-$40 in you monthly payment,
but you just have saved $7,000 of cash and could buy a new home.
How To Avoid Paying PMI
Purchase a home using both a first and second mortgage. The first
mortgage would be for 80% of the home's appraised value. The second
mortgage, which would close at the same time as the first, would
be for 10% of the home's appraised value. In other words, if you
have a 10% down payment, your first loan would provide for the 80%
mortgage with a second mortgage of 10%. This is commonly referred
to as an 80 -10 -10 transaction. These are also available as 75/15/10
from certain lenders. While mortgage insurance premium payments
are not tax deductible, the interest on a 2nd mortgage would be
fully tax deductible. Another added benefit is that the second mortgage
is typically amortized over 15 years, increasing your equity faster.
Some lenders offer self-insured programs. This type of loan would
carry a higher interest rate than a standard loan with PMI. While
mortgage insurance premium payments are not tax deductible, the
interest associated with a self-insured mortgage would be tax deductible.
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