By Nathan Walldorf, ABR, GREEN, GRI, SFR, e-Pro
President, Greater Chattanooga Association of Realtors
According to the National Association of Realtors’ (NAR) 2016 Profile of Home Buyers and Sellers, the most difficult step in the home buying process is saving for a down payment. And with the cost of rent so high, renters are finding it more and more difficult to save. So what are some out of the box, but simple, ways that a renter can save for a down payment? To help get your creative financing juices flowing, consider these NAR-suggested options:
Crowdsource Your Dream Home. You may have heard of people using sites like Kickstarter to fund creative projects like short films and concert tours. Well, who says you can’t crowdsource your first home? Forget the traditional registry, the fine china, and the 16-speed blender. Use sites like Feather the Nest and Hatch My House to raise your down payment. Hatch My House says it’s helped Americans raise more than $2 million for down payments.
Ask the Seller to Help. Really! When sellers want to a get a deal done quickly, they might be willing to assist buyers with the closing costs. Fewer closing costs = more money you can apply toward your deposit. Ask your Realtor to help you negotiate for seller’s concessions, such as 2% of the overall sales price in concessions to help with the closing costs.
Keep in mind, however, if you ask a seller to pay for some of your closing costs, you are really presenting the seller your offer price minus the amount of money that you need for closing costs. In a seller’s market, like we currently are in, it is likely you’ll have to offer more than the seller’s asking price to make up for the amount you’re asking of the seller in closing costs.
Also, keep in mind that there are limits on concessions depending on the type of mortgage you get. For FHA mortgages, the cap is 6% of the sale price. For Fannie Mae-guaranteed loans, the caps vary between 3% and 9%, depending on the ratio between how much you put down and the amount you finance. Individual banks have varying caps on concessions. No matter where they net out, concessions must be part of the purchase contract.
Look into Government Options. The U.S. Department of Housing and Urban Development (HUD) offers a number of homeownership programs, including assistance with down payment and closing costs. These are typically available for people who meet particular income or location requirements. HUD has a list of links by state that direct you to the appropriate page for information about your state.
HUD offers help based on profession as well. If you’re a law enforcement officer, firefighter, teacher, or EMT, you may be eligible under its Good Neighbor Next Door Sales Program for a 50% discount on a house’s HUD-appraised value in “revitalization areas.” Those areas are designated by Congress for homeownership opportunities. And if you qualify for an FHA-insured mortgage under this program, the down payment is only $100; you can even finance the closing costs.
For veterans, the VA will guarantee part of a home loan through commercial lenders. Often, there’s no down payment or private mortgage insurance required, and the program helps borrowers secure a competitive interest rate.
Some cities, including Chattanooga, also offer homeownership help via organizations such as Chattanooga Neighborhood Enterprise (CNE). Through loan programs, counseling, education and down payment assistance, CNE is not only helping home buyers but also revitalizing neighborhoods.
Check with Your Employer. Employer Assisted Housing (EAH) programs help connect low- to moderate-income workers with down payment assistance through their employer. For example, in Pennsylvania participating EAH employers offer employees to apply for a loan of up to $8,000 for down payment and closing cost assistance. The loan is interest-free and borrowers have 10 years to pay it back. Earlier this year, GCAR began training Realtors on EAH programs and continues to explore ways to implement such a program in Greater Chattanooga. In the meantime, ask the human resources or benefits personnel at your employer if the company is part of an EAH program.
Take Advantage of Special Lender Programs. Many lenders offer programs to help people buy a home with a small down payment. A common misconception is that you need 20% for the downpayment. You may be surprised to learn there are several programs that only require as little as 3.5% downpayment. You’ll need to confirm with your lender the details and inquire about any upfront and monthly mortgage insurance payments required. Check with your lender and inquire about their first-time buyer programs.
The task of saving for a downpayment isn’t so daunting after all, is it? There’s actually a lot of help available to many first-time buyers who want to achieve their homeownership dreams. All you need to do is a little research — and start peeking at those home listings!