Every home buyer has a different answer to how much money they need to put down when buying a house- here’s how you know you have enough money to buy a house
- No money down options for select borrowers including USDA loans and VA loans
- Down Payment assistance loans, pluses, minuses and when they can work for you
- Affordable program loans- is 3% the right number for me?
- FHA 3.5% down payment loans- a good option for a whole lot of people
- Standard conventional 5% loans
- Conventional loans with 20% down- the cheapest long term monthly option for those with free cash
- Closing cost help from sellers, lenders and agents, should I ask someone else to pay my closing costs, and how much will that cost me?
The last two weeks we talked about how to buy a house part one and part two, in this next series of blog posts over the next month or two we will talk about some of the individual components that we briefly spoke about in these two articles. I say briefly with not some slight bit of trepidation as both of those posts when 2,000 plus words, but there’s just a lot to unpack. Those 2 posts tried to explain everything that happens in the process conceptually, now we are going to dive deeper into an explanation of how those parts in the process works. Don’t worry, however, if you stick with me here in about 1500 words you will know every loan program we offer and have an answer to the question, “How much money do I need to buy a house?”
No Money, No Problem- 2 options for unique situations requiring no down payments:
One of the loan options we have with no down payment necessary from the borrower is a VA loan. We discussed the pluses and minuses of a VA loan here. The VA loan has a ton of advantages, including no mortgage insurance, smoking low interest rates, and sometimes a really high back end ratio on debt to income (don’t worry if that sentence didn’t make a ton of sense to you- we will get to that in a couple weeks) but probably the chief advantage to most borrowers, in my opinion, is no money down required. So, how do you qualify for a VA loan? Pretty easy really, serve our country honorably for a time on active duty, or for a significantly longer time in the reserves. Ok, that doesn’t sound so easy, I guess. It’s a seriously awesome program that we (government) do to help our veterans out and any veteran looking for a loan should lead with, “I’m former military, do I qualify for a VA loan” when they are talking to their loan officer.
Profile of who fits this loan: Veterans. Lets not overthink this
We talked about the pluses and minuses of a USDA loan here. It’s a great loan for a lot of people, especially in Texas, as many of our areas in this state qualify for this loan. In short- the USDA loan is designed to give people that make an average amount of money in a rural community a way to get into a house with no money down, and all at a very cheap monthly mortgage insurance price with 1% funding fee that can be rolled into your loan. If you are not a veteran and you don’t have 20% to put down this is my starting point for almost everyone I speak with.
I can’t overestimate enough how great it is to buy a house in this program. When people hear rural they sometimes think, “oh, that’s not me I don’t want to live on a farm”, but the reality is that tons of suburban places around Houston, Austin, Dallas and San Antonio qualify for the program so this should be a starting point for many people.
Profile of who fits this loan: Average income family of 4’s, slightly above average income families of 5 or more, who don’t necessarily want to live within 30 miles as the crow flies from the heart of a major, metropolitan down town area.
Down payment assistance program: is 1.5% down the right number for me?
A few items to take care of first here- Not everyone qualifies for down payment assistance programs. In the main, the people that qualify for a down payment assistance program that I can help meet one of the following descriptions (list is not exhaustive rather illustrative)
- First Time Home Buyer
- Someone who makes less than 140% of the median income in their community
- Fire Fighters
- Police Officers
We wrote about the pluses and minuses of the program here but to be brutally frank I don’t love this program. I’m not even sure I like this program. Typically, it comes with an interest rate ~2% higher than I could otherwise qualify a borrower for on a 3% down payment program or a 3.5% down payment program. That monthly interest rate will eat up the 2% grant (completely forgive-able) right quick and in a hurry. I would never put somebody in a loan like this if they didn’t have an exit strategy to get down to a more market based rate inside of a year. If that is something you are interested in (refinancing) after you’ve established a payment history this is a program we can talk about, but at the end of the day it can be a risky proposition, to assume you will get a more solid deal later down the road. Life will happen and when it does I prefer to have people living in a house with a manageable payment.
Profile of who fits this loan: Someone who has manageable monthly debt payments, is either in a special category of what is commonly called “hero loans” or is at the beginning of their working career, and doesn’t mind the idea of refinancing their loan in 6 to 12 months.
3% down payments- is the affordable program right for me?
I’ve never written about this program before- so I guess at some point in time in the future I will be rectifying that glaring omission. The affordable program, much like other down payment assistance programs, doesn’t fit everyone. it is for
- First time home buyers
- People below a certain income cap
- People that qualify through some other means
This is a really good program. Your interest rate might be the same as a traditional conventional 5% down program, but sometimes it is considerably cheaper (the market is a goofy place guys- pricing changes by the second, some lender is almost always running a special to buy more market share, every now and again our vendors get in a price war to your benefit, there’s a lot of ins and outs and what have you’s- you really should work with a professional with your interests at heart).
- Lower interest rates at many times
- No funding fee- meaning your loan amount will be 3% less than your purchase price
- Mortgage insurance that disappears after 80% LTV is reached
- Not everyone qualifies
- Lower DTI ratios for qualification purposes
- Often times significantly higher mortgage insurance than a 5% down loan, and if credit isn’t really good it can be significantly higher than an FHA loan
- Cap at 3% closing cost from interested parties (seller, lender, agent)
Profile for who best fits this loan: Lots of times younger couples who are just starting their careers and either looking for a first time home or haven’t advanced far enough in their career where they are making a ton of money. This is for people who manage their credit really well, have low debt and high credit scores, but haven’t had enough time to accumulate a significant amount of savings. Generally a house priced at median in your market would be likely entry point for purchase price.
3.5% down FHA loan- this might not be the loan for everyone, but everyone is eligible to participate in this program:
We wrote about FHA programs here and as a quick summary here are some pluses and minuses here
- Everyone is eligible for the program (not to say everyone qualifies but everyone is eligible)
- People with credit challenges can qualify
- 6% concessions from interested parties are allowed for closing costs
- interest rates are fantastic
- mortgage insurance is standard 0.85%- if you have slightly dinged credit this is by far the most affordable option in the market
- People that need a higher back end ratio
- Mortgage insurance never goes away while you have the loan
- 1.75% funding fee, that while it can be rolled into the loan, makes your total debt on the house more expensive
Profile for someone who does an FHA loan: This loan is that is great for at TON of people. Like, maybe 50% of the people that I talk to are really good candidates for an FHA loan- while the other 50% fit in all the other loan categories. This is a loan for anyone under 700 credit score to seriously consider. Obviously, if we can qualify you for a VA or USDA loan we will do so for the reasons stated above but if you don’t then this is a really affordable loan with a relatively low down payment and a really low interest rate.
5% down conventional
This is like the affordable program with the caveat that everyone is eligible for this loan. The difference between monthly PMI payments for 3% down vs 5% down can be very significant, so if your monthly payment is important to you this is a good opportunity for savings in your monthly payment. Also, you can get more concessions from interested parties
Profile of who benefits from this loan: This is typically a great loan for someone who has a really good credit score, has bought a house before or is an above average owner, and wants to pay a lesser amount of PMI. Also, someone who values their cash situation more dearly than monthly payments.
20% down conventional
This is the most expensive way to get into a home from the standpoint of money down. A full range of explanation is dealt with here. Everyone is eligible for this loan. There is no PMI
Profile of who benefits from this loan: Typically, this is for people with good credit, high earnings and significant amount of cash reserves. You get a lower payment with this loan than with any other options. Typically this is for someone later in their careers who has accumulated cash, or who is selling another home and rolling their equity over into their new home.
I’m a huge believer in Dave Ramsey and his 7 baby steps. You can find that here. The upshot of this idea is that baby step 6 is to pay off your home and that comes after you are debt free, have 3-6 months emergency funds on hand, and are saving for your retirement and kids college. If you’ve done all this put down everything you can on the house. Until you are at that point in time, in my opinion, it’s better to stick with one of these other programs. When you get to the point where you are talking about putting 20% (or more) down on your house you are pretty close to the pinnacle of financial freedom. Enjoy and congrats on a lifetime spent managing your finances extremely well.
Closing costs and how that affects how much money I need to buy a house:
Nope. Not going to do it right now. I have to leave you wanting something for next week. This is what we are going to talk about in part 2 of “how much money do I need to buy a house next week!”
If you’ve read this far bless you and thank you. You’ve seen the profiles of who typically gets each type of loan, and how much it will cost in down payment for you to get into these programs. I can’t stress enough that each individual person has their own individual strengths and challenges and requirements in getting a loan. There’s no one size fits all approach. Talk to a mortgage professional. I’d love to help. Call me at 832-557-1095 or email me at firstname.lastname@example.org
Thank you and see you all next week, same bat time, same bat channel.