Inside Mortgages - Overcoming The Hurdles Of Raising A Down Payment
James R. DeBoth, President--Interest.com
Monday, January 10, 2005
For many first-time buyers, the biggest problem they face is coming up with a large chunk of money for the down payment. Compare to amassing thousands of dollars to buy that first home, finding a home is relatively easy. And getting an affordable home mortgage loan isn't that difficult if you have good credit. Once you have that down payment, plenty of lenders will be eager to loan you money.
Being able to afford monthly mortgage payments does not have to be an issue either. If you are like most people, you can find a mortgage payment that is comparable to the rent you are paying. Even if it is a bit larger, it is still a better deal when you consider the income tax deductions your monthly payments will generate, and the fact that you are building equity in your own home.
None of this can happen, however, unless you come up with a down payment, or find a way to buy a house without one. To avoid having to make a down payment, you usually need to be either a veteran or currently in the military so you can qualify for a no-down-payment VA loan guaranteed by the Department of Veterans Affairs. Or, you have to qualify for a no-down-payment loan. If you don't fit into these categories, you will have to come up with an alternative to raise the money that is needed. There are several ways to raise the money: through savings; by borrowing from others or from your own reserves; a gift; a DAP, or finding something to sell.
Although using your savings is the simplest solution, it also is probably the most difficult. It takes time to save thousands of dollars. You also should consider the long-term costs involved. If you wait until you save the down payment, you will be borrowing less and making smaller mortgage payments. But if you are renting while you are saving, you lose the income tax deductions that mortgage interest generates as well as the opportunity to build equity in a home of your own.
Borrowing down payment money from another source is an option, but you have to be careful here. Lenders need to know how much you owe so they can look at your debt-to-income ratio. The more you owe, the less likely you are to qualify for a low monthly mortgage payment. That's also why lenders want to know how much you make, and how much you have in savings.
You could "borrow" the money from yourself. Let's say you own stocks and bonds that you can borrow against. Since it is your own money you are borrowing, you are not normally required to pay it back. But you will pay interest on the “loan.” In the case of stocks and bonds, that interest is generally deductible on your income tax. In some cases you can also borrow against your life insurance policy. Here again, the loan might not have to be repaid, but the value of the policy is reduced by the amount borrowed, plus interest.
If you do use money from these sources you will very likely need a letter from your broker or insurance agent explaining the fact that you are not required to pay back the "loan." It might not completely solve the problem of coming up with a down payment, but it could reduce the amount you will need and make it more manageable. And if you receive money from a family member, the lender will ask for a letter explaining any sudden or major deposits. You also will likely need what is referred to as a "gift letter" from the person who gave you the money stating that it is a gift, and not a loan that has to be repaid.
Another option is to turn to a DAP (down payment assistance program). Although there are many different programs, most of them work in cooperation with either lenders or sellers that contribute to a pool that makes down payment funds available to first-time buyers, or those who have been renting for several years. In most cases, down payments received from DAPs are gifts that do not have to be repaid. While some DAPs are run by government agencies, others are charitable, and some are church-based. Two of the biggest are AmeriDream, at http://www.ameridream.org/, and Nehemiah, at http://www.nehemiahcorp.org/.
The best way to locate a DAP is to talk to your lender, your local housing authority, city hall, or a legislator. There is a great deal of money available for down payment assistance because even though this money “looks” like charity, it is not. When people buy a house they take better care of it, spend more on upkeep, and, in general, improve their neighborhood and local tax base. It really is a win-win situation.
The last option is to find something-or some things-that can be converted into a down payment. Do you own antiques? A coin or stamp collection? Is there anything you are willing to sell that might help raise at least some of the money needed for that down payment? Do not automatically assume you don't. Instead, take a look at what you have, and see what it is worth. One way to get a rough idea of an item's value is to see what similar things are selling for in the newspaper or at online auctions, like eBay. And then, who knows? Maybe you'll be able to raise some money at a garage sale where you currently rent to start the process of having a home and garage of your own.
Monday, January 10, 2005
For many first-time buyers, the biggest problem they face is coming up with a large chunk of money for the down payment. Compare to amassing thousands of dollars to buy that first home, finding a home is relatively easy. And getting an affordable home mortgage loan isn't that difficult if you have good credit. Once you have that down payment, plenty of lenders will be eager to loan you money.
Being able to afford monthly mortgage payments does not have to be an issue either. If you are like most people, you can find a mortgage payment that is comparable to the rent you are paying. Even if it is a bit larger, it is still a better deal when you consider the income tax deductions your monthly payments will generate, and the fact that you are building equity in your own home.
None of this can happen, however, unless you come up with a down payment, or find a way to buy a house without one. To avoid having to make a down payment, you usually need to be either a veteran or currently in the military so you can qualify for a no-down-payment VA loan guaranteed by the Department of Veterans Affairs. Or, you have to qualify for a no-down-payment loan. If you don't fit into these categories, you will have to come up with an alternative to raise the money that is needed. There are several ways to raise the money: through savings; by borrowing from others or from your own reserves; a gift; a DAP, or finding something to sell.
Although using your savings is the simplest solution, it also is probably the most difficult. It takes time to save thousands of dollars. You also should consider the long-term costs involved. If you wait until you save the down payment, you will be borrowing less and making smaller mortgage payments. But if you are renting while you are saving, you lose the income tax deductions that mortgage interest generates as well as the opportunity to build equity in a home of your own.
Borrowing down payment money from another source is an option, but you have to be careful here. Lenders need to know how much you owe so they can look at your debt-to-income ratio. The more you owe, the less likely you are to qualify for a low monthly mortgage payment. That's also why lenders want to know how much you make, and how much you have in savings.
You could "borrow" the money from yourself. Let's say you own stocks and bonds that you can borrow against. Since it is your own money you are borrowing, you are not normally required to pay it back. But you will pay interest on the “loan.” In the case of stocks and bonds, that interest is generally deductible on your income tax. In some cases you can also borrow against your life insurance policy. Here again, the loan might not have to be repaid, but the value of the policy is reduced by the amount borrowed, plus interest.
If you do use money from these sources you will very likely need a letter from your broker or insurance agent explaining the fact that you are not required to pay back the "loan." It might not completely solve the problem of coming up with a down payment, but it could reduce the amount you will need and make it more manageable. And if you receive money from a family member, the lender will ask for a letter explaining any sudden or major deposits. You also will likely need what is referred to as a "gift letter" from the person who gave you the money stating that it is a gift, and not a loan that has to be repaid.
Another option is to turn to a DAP (down payment assistance program). Although there are many different programs, most of them work in cooperation with either lenders or sellers that contribute to a pool that makes down payment funds available to first-time buyers, or those who have been renting for several years. In most cases, down payments received from DAPs are gifts that do not have to be repaid. While some DAPs are run by government agencies, others are charitable, and some are church-based. Two of the biggest are AmeriDream, at http://www.ameridream.org/, and Nehemiah, at http://www.nehemiahcorp.org/.
The best way to locate a DAP is to talk to your lender, your local housing authority, city hall, or a legislator. There is a great deal of money available for down payment assistance because even though this money “looks” like charity, it is not. When people buy a house they take better care of it, spend more on upkeep, and, in general, improve their neighborhood and local tax base. It really is a win-win situation.
The last option is to find something-or some things-that can be converted into a down payment. Do you own antiques? A coin or stamp collection? Is there anything you are willing to sell that might help raise at least some of the money needed for that down payment? Do not automatically assume you don't. Instead, take a look at what you have, and see what it is worth. One way to get a rough idea of an item's value is to see what similar things are selling for in the newspaper or at online auctions, like eBay. And then, who knows? Maybe you'll be able to raise some money at a garage sale where you currently rent to start the process of having a home and garage of your own.
posted by Kirby P at 7:16 AM
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