New Construction: Different Types for a Variety of Buyers

Shopping for a new-construction home? One of the first things to decide is what type to choose: a custom, spec or tract home. Ask yourself if you want to help design a home that’s a perfect fit or fit into one already built. As you begin your search, here are some pros and cons to help you make your decision.

Custom homes

Custom homes are built for and with you. You can buy the land and hire an architect builder to help create your unique vision; or you can enter into a contract with a developer or builder to create a home on land he owns. Either way, you collaborate with to build a home that fits your tastes and lifestyle.

Builders often have basic plans you can tweak for an additional cost. That might mean adding a laundry room on the main floor or including an in-law suite in the basement. With custom homes you can make rooms bigger or smaller, upgrade cabinets and pick bathroom tile that warms your feet and heart. The builder will give you a budget for each finish, and apply a credit if you go under and charge you more if you exceed the limit.

Pros: You have a big say in just about everything. You decide on the floor plan: Do you want a formal dining room and a breakfast nook? You pick upgrades according to your taste and budget: Think high-end appliances, heated bathroom floors and french doors. Your home reflects your style, and it doesn’t look like every other house on the block.

Cons: You’re responsible for all the decisions: floor plan, landscaping, flooring, finishes, paint colors, cabinets and more. Even if you work with an interior designer, you will still make the final choices. So if decision-making isn’t your strong suit, building a custom home could feel like an overwhelming chore rather than a creative opportunity.

Spec homes

That’s short for “speculative,” because builders or developers construct a single-family home, townhouse or condo before having a specific buyer. Consequently, spec homes come with features and finishes the builder thinks will appeal to the greatest number of potential buyers. You may be able to find a spec home under construction and pick some elements such as counters and cabinets. But typically spec homes are a completed package.

Pros: The work and decisions have been done for you. If you don’t have the time or inclination to make a million choices, this may be the best option. It’s usually move-in ready, and you can make changes like paint colors once you own the place.

Cons: Some spec builders go with “builder grade” or “contractor grade” materials, which are generally considered inexpensive products made from low-grade materials. This may mean you’ll get low- or mid-range appliances, flooring, counters and cabinets. While it’s a budget-friendly choice, you may be sorry in the long run.

Tract homes

Tract homes (called that because they’re developed on a large tract or parcel of land) are usually built in planned communities outside the city core. You may buy an available lot and pick a floor plan if the development is in-progress, or an already built home in the tract. Each developer provides design choices that establish a cohesive look and feel.

Pros: Many planned communities include perks like clubhouses, pools, tennis and sports courts. They often are built near transit hubs to make commutes easier. Price can be a compelling reason to buy in planned communities, where builders take advantage of volume buying to lower material costs.

Cons: Turning a profit depends on how quickly and cost-effectively the builder can construct the homes, so check the quality of both materials and construction methods.

Lots/land

Buying an undeveloped lot that’s not associated with a planned community gives you many options. You can build a home now, or wait until you have time and money. Even if you build nothing, land can be a smart investment, depending on the location. As Mark Twain said, “Buy land, they’re not making it anymore.”

Pros: Lots give you the opportunity to build your dream house on your own schedule. When you’re ready, you can select a custom builder and make the choices that fit your budget and lifestyle.

Cons: You’ll be paying property taxes even if you haven’t built on it, and you’ll need to maintain it (keeping grass cut, for example) if you want to stay on the good side of your future neighbors. Undeveloped lots may not be connected to electricity, sewer, water, or natural gas, which are expensive to bring to your property line when you decide to build. Also zoning may not allow you to develop the land the way you’d like. Research what your options are before you buy.

If you’re interested in newly build homes, we have more tips about how to buy a brand-new home and how to work with a contractor.

Source: zillow.com

Want to Rent Your Vacation Home? Beware These Lender Rules

When it comes to financing your vacation home, not all loans are created equal — so choose wisely.

Ready to buy that ski cabin or lake house? Renting it out while you’re not using it is a great way to make it happen — but not so fast. Lender rules may not allow it, so here’s what you need to know.

Different loans have different rules

The first step to financing your vacation home is understanding what mortgages are available and their rules about renting:

  • Primary residence loans. These loans are the most favorable, and you’ll get the lowest possible mortgage rates. These loans require you to move into the home within 60 days of closing and live in it for at least one year. After that, you’re free to rent out the home.
  • Second-home loans. These loans have the same rates as primary residences, so your rate will be the lowest it can be, but down payments must be larger — most lenders require 20 percent down. You qualify for the loan using your full primary residence housing cost plus your full second home cost. You can use the home for family and friends, but lenders won’t let you rent the home.
  • Non-owner occupied loans. Also called rental property loans, these loans offer rates .25 percent to .375 percent higher than primary-residence or second-home rates, and down payment requirements typically start at 30 percent. Your lender will let you know if you can use the rental income to qualify. These loans allow you to rent the home and use it when it’s not rented.

Second-home loans come with restrictions

The best thing about a second-home mortgage is that the rates are the same as a primary residence mortgage. The worst thing is that you can’t rent the home.

This is an often overlooked provision of second-home loans, but it’s the most important, because if you ever rent your vacation getaway, you’ll violate the loan’s terms.

When you get a loan, there’s a document called the note, which spells out the loan’s amount, rate, payments and fixed versus adjustable periods. Depending on what state you live in, you’ll also have either a mortgage or a deed of trust in addition to your note, which spells out additional loan requirements. (See which states use mortgages versus deeds of trust.)

At first glance, a second-home mortgage or deed of trust seems like it has the same requirements as a primary residence. Provision 6 says you must move in within 60 days and live there for at least one year — then you’re free to rent it out. Here’s a sample:

secondhomeoccupancyHowever, there’s an addendum — called a rider — in mortgages and deeds of trust that replaces this friendly requirement with a new, much more strict requirement saying that you can’t rent out the home. Here’s a sample:

secondhomeoccupancyaddendum

This language, though hidden deep in the loan documents you’ll sign before closing, makes two critical points:

  • You can’t rent the home.
  • If you applied for a second-home loan and rent it out, your entire loan balance could be called due and payable by your lender.

So, if you plan to afford a vacation home by renting it out, you can’t finance it with a second-home loan. But you’ll need to review non-owner-occupied loan options with your lender to meet the objective of using and renting a home that’s not your primary residence.

As noted above, this means you’ll need to put down a larger down payment, and your rate will be slightly higher. But it’s a small price to pay for the flexibility of earning income from a home that you also use for your own enjoyment.

Top photo from Shutterstock.

Related:

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Originally published October 4, 2016.

Source: zillow.com

What Is Escrow and How Does It Work?

No matter where you’re buying a home, at some point you’re going to find yourself deep in escrow. (Don’t worry. It’s not as bad as it sounds.) What is escrow? In real estate, it has several meanings, but they all boil down to your house and your money being in a kind of limbo.

Escrow is when an impartial third party holds on to something of value during a transaction.

Escrow and offers

When you make an offer on a home, you will write an earnest money check that will be placed in “escrow.” That means it isn’t going directly to the seller but is being held by an impartial third party until you and the seller negotiate a contract and close the deal. You can’t touch it and the seller can’t touch it. It’s in escrow.

That’s important because it protects both parties. Say you put down earnest money that went directly to the seller and then couldn’t reach a final purchase and sale agreement. You don’t want the seller holding your earnest money hostage as a negotiating ploy. Likewise, the seller won’t want to sign over the deed to the home until you’ve paid for it. And you won’t want to hand over cash without the deed being signed. Escrow ensures everyone gets what they are due at essentially the same time.

Escrow and lenders

When you are talking with your mortgage lender, you’ll hear about escrow again. They might talk about an “escrow” or “impound” account or “reserves.” They may use these terms interchangeably, and that’s OK because they all mean the same thing. They are funds held by the lender to make payments for your homeowners insurance and property taxes. Lenders will collect them monthly along with your loan payment and then pay the tax and insurance bills when they are due. That’s because your lender has a vested interest in making sure those payments are made. You may hear the term “prepaids” as well. That’s money collected in advance for those bills to ensure they’ve got enough on hand to pay them when they are due.

Escrow and closing

Finally, you may hear someone refer to the “closing of escrow.” That’s when your purchase is completed. A closing or “escrow officer” will oversee the final paperwork and handle the exchange of funds and recording of deeds. This person, sometimes an attorney, will ensure that all the money is properly disbursed, that the documents are signed and recorded, and that all necessary conditions are met before closing the escrow.

What is a hold-back of funds?

Sometimes the sale may be completed and ownership transferred while funds are still held in escrow. For instance, if you’ve agreed to let the seller’s family stay in the house for an extra week until their new home is ready, you would sign a “rent-back” agreement requiring the seller to pay you a daily rate for the length of their stay. In the case of such a rent-back, your real estate agent will likely advise you to have the escrow agent hold back a portion of the seller’s proceeds until they’ve moved out and left the house in the condition specified in your contract.

Or perhaps you found something wrong during your final walkthrough of the house. Maybe the seller agreed to make the repair, but the work couldn’t be completed by closing day. Money can be held in escrow to cover the cost.

If you’re purchasing new construction, you may have funds held in escrow until all work is complete and you’ve signed off on it.

Once escrow is closed and all funds have been disbursed, you and the seller will receive a final closing statement and other documents in the mail. Check the statement carefully and call the closing agent immediately if you spot an error. File the statement with your most important papers. You’ll need it when you file your next income tax return.

Source: zillow.com

What Type of Mortgage Is Best for You?

Just as homes come in different styles and price ranges, so do the ways you can finance them. While it may be easy to tell if you prefer a rambler to a split-level or a craftsman to a colonial, figuring out what kind of mortgage works best for you requires a little more research. There are many different loan types to choose from, and a great lender can walk you through all of your options, but you can start by understanding these three main categories.

Fixed-rate loan or adjustable-rate loan

When deciding on a loan type, one of the main factors to consider is the type of interest rate you are comfortable with: fixed or adjustable. Here’s a look at each of these loan types, with pros and cons to consider.

Fixed-rate mortgages

This is the traditional workhorse mortgage. It gets paid off over a set amount of time (10, 15, 20 or 30 years) at a specific interest rate. A 30-year fixed is the most common. Market rates may rise and fall, but your interest rate won’t budge.

Why would you want a fixed-rate loan? One word: security. You won’t have to worry about a rising interest rate. Your monthly payments may fluctuate a bit with property tax and insurance rates, but they’ll be fairly stable. If rates drop significantly, you can always refinance. The shorter the loan term, the lower the interest rate. For example, a 15-year fixed will have a lower interest rate than a 30-year fixed.

Why wouldn’t you want a fixed rate? If you plan on moving in five or even 10 years, you may be better off with a lower adjustable rate. It’s the conservative choice for the long term, which means you will pay for the security it promises.

Adjustable-rate mortgages (ARMs)

You’ll get a lower initial interest rate compared to a fixed-rate mortgage but it won’t necessarily stay there. The interest rate fluctuates with an indexed rate plus a set margin. But don’t worry — you won’t be faced with huge monthly fluctuations. Adjustment intervals are predetermined and there are minimum and maximum rate caps to limit the size of the adjustment.

Why would you want an ARM? Lower rates are an immediate appeal. If you aren’t planning on staying in your home for long, or if you plan to refinance in the near term, an ARM is something you should consider. You can qualify for a higher loan amount with an ARM (due to the lower initial interest rate). Annual ARMs have historically outperformed fixed rate loans.

Why wouldn’t you want an ARM? You have to assume worst-case scenario here. Rates may increase after the adjustment period. If you don’t think you’ll save enough upfront to offset the future rate increase, or if you don’t want to risk having to refinance, think twice.

What should I look for? Look carefully at the frequency of adjustments. You’ll get a lower starting rate with more frequent adjustments but also more uncertainty. Check the payments at the upper limit of your cap and make sure you can afford them. Relying on a refinance to bail you out is a big risk.

Here are the types of ARMs offered:

  • 3/1 ARM: Your interest rate is set for 3 years then adjusts annually for 27 years.
  • 5/1 ARM: Your interest rate is set for 5 years then adjusts annually  for 25 years.
  • 7/1 ARM: Your interest rate is set for 7 years then adjusts annually for 23 years.
  • 10/1 ARM: Your interest rate is set for 10 years then adjusts annually for 20 years.

2. Conventional loan or government-backed loan

You’ll also want to consider whether you want — or qualify for — a government-backed loan. Any loan that’s not backed by the government is called a conventional loan. Here’s a look at the loan types backed by the government.

Federal Housing Administration (FHA) loans

FHA loans are mortgages insured by the Federal Housing Administration. These loans are designed for borrowers who can’t come up with a large down payment or have less-than-perfect credit, which makes it a popular choice for first-time home buyers. FHA loans allow for down payments as low as 3.5 percent and credit scores of 580 or higher. A credit score as low as 500 may be accepted with 10 percent down. You can search for FHA loans on Zillow.

Because of the fees associated with FHA loans, you may be better off with a conventional loan, if you can qualify for it. The FHA requires an upfront mortgage insurance premium (MIP) as well as an annual mortgage insurance premium paid monthly. If you put less than 10 percent down, the MIP must be paid until the loan is paid in full or until you refinance into a non-FHA loan. Conventional loans, on the other hand, do not have the upfront fee, and the private mortgage insurance (PMI) required for loans with less than 20 percent down automatically falls off the loan when your loan-to-value reaches 78 percent.

Veterans Administration (VA) loans

This is a zero-down loan offered to qualifying veterans, active military and military families. The VA guarantees the loan for the lender, and the loan comes with benefits not seen with any other loan type. In most cases, you pay nothing down and you will never have to pay mortgage insurance. If you qualify for a VA loan, this is almost always the best choice. You can learn more about qualifying guidelines for VA loans or look for VA lenders on Zillow.

USDA loans

USDA loans are backed by the United States Department of Agriculture (USDA) and are designed to help low- or moderate-income people buy, repair or renovate a home in rural areas. Some suburban areas qualify, too. If you are eligible for a a USDA loan, you can purchase a home with no down payment and get below-market mortgage rates.

3. Jumbo loan or conforming loan

The last thing to consider is whether you want a jumbo loan or conforming loan. Let’s take a look at the difference between the two.

A conforming loan is any home loan that follows Fannie Mae and Freddie Mac’s conforming  guidelines. These guidelines include credit, income, assets requirements and loan amount. Currently the limit in most parts of the country is $417,000, but in certain designated high-price markets it can be as high as $938,250. Wondering if you’re in a high-cost county? Here is the entire list of conforming loan limits for high-cost counties in certain states.

Loans that exceed this amount are called jumbo loans. They’re also referred to as non-conforming mortgages. Why would you want a jumbo loan? The easiest answer is because it allows you to buy a higher-priced home, if you can afford it. But these loans have flexibility that conforming loans don’t have, such as not always requiring mortgage insurance when the down payment is less than 20 percent. Why wouldn’t you want a jumbo loan? Compared to conforming loans, interest rates will be higher. And they often require higher down payments and excellent credit, which can make them more difficult to qualify for.

You can read more about these and other programs here. It’s also a good idea to talk to a local lender to hear more about their options — get prepared by familiarizing yourself with mortgage-related terms using our handy glossary.

Source: zillow.com

Piggyback Loan Is Another Home Financing Option

Shopping around for a home loan? Then you’re probably trying to figure out how to strike the best balance between your down payment and monthly mortgage expenses. Understanding just how much house you can afford is tricky, which is why it helps to know all of your options in advance.

Piggyback loans are just one more financing option you have at your fingertips for purchasing the home of your dreams — even without that 20% down payment. These loans involve taking out two rather than one mortgage, but can save you thousands of dollars on private mortgage insurance for borrowers who can’t afford a large down payment. Ready to learn more about piggyback home loans and if borrowing one is the right choice for you? Keep reading.

What Is a Piggyback Loan?

A piggyback loan, true to its name, is a set of two loans — with one piggybacking off the other. These loans are also sometimes referred to 80/10/10 loans, where the first loan is equal to 80% of your home’s purchase price, and the second loan is equal to 10% of the purchase price. This type of financing structure assumes you have at least 10% of the home’s purchase price to put toward a down payment.

Since many lenders require private mortgage insurance (PMI) on mortgages with less than a 20% down payment, this financing structure can help bridge that gap (for borrowers who don’t have the full 20% saved up) and ensure that you avoid paying extra PMI fees— which definitely don’t come cheap.

Let’s crunch some numbers as an example. Say you want to buy a home for $300k. Using a piggyback loan, your financing plan would look something like this:

1st loan (80%) $240k
2nd loan (10%) $30k
Down payment (10%) $30k

As you can see, using this financing structure will save you roughly half the sum of your down payment, allowing you to focus on saving up $30k rather than a whopping $60k in order to buy your home.

Benefits of piggyback loan

The biggest benefit of a piggyback loan is the savings you get from not having to take out a PMI policy. These insurance policies, which are required by most banks for borrowers putting less than 20% down on their homes, typically cost anywhere from 0.5% to 1% of your total loan amount per year. Some experts claim this number can even go up to 1.86% per year. This might sound insignificant, but let’s crunch some numbers to really see what it might actually cost you.

Using the same example as before, let’s say you were to take out a conventional loan for a house with a $300k listing price, and put 10% as a down payment. This would put your loan amount at roughly $270k. Here’s what various PMI payments might look like on a loan this size.

PMI rate (as % of your loan) Annual payment due Monthly payment due
0.5% $13,500 $1,125
1% $27,000 $2,250
1.86% $50,220 $4,185

As the numbers will show, PMI is clearly nothing to scoff at. In fact, PMI is so expensive that it could easily cost you a monthly mortgage payment many times over— in addition to actually having to pay your mortgage each month as well.

Things To Keep in Mind

Now that you know a bit more about piggyback loans, and all the savings they can provide, let’s talk about some of the downsides. After all, if piggyback mortgages are so convenient, why don’t more people get them?

The biggest downside of piggyback loans (and the reason more people don’t have them) is because they’re actually pretty hard to get. Think about it: Instead of going through the loan approval process once, you have to go through it twice. You’ll also be borrowing two separate loans at once, which is seen as a higher risk to many lenders.

These loans require higher credit scores, and you might even need to apply through a special lender who is accustomed to dealing with these types of financing packages. There’s also repayment to consider. Although refinancing a mortgage is typically seen as a relatively simple move for borrowers interested in securing lower interest rates— refinancing will be a lot harder when you have two loans instead of one. You’ll also be responsible for paying the closing costs on two separate loans (typically 2% to 5% of the loan amount) as well as any loan origination fees the lender may charge.

How To Apply

According to the credit experts at Experian, you’ll need a “very good to exceptional” credit score in order to qualify for a piggyback loan. Meaning, your score will need to be at least 700, although you’re more likely to qualify with a score of 740 or higher.

You should also plan on having enough saved up for as much of a down payment as you can afford, plus some extra funds for closing costs and other fees associated with buying your home. Finally, you’ll want to make sure your debt-to-income ratio is within a reasonable range before approaching lenders. While all of these things are pretty standard for anyone on the market to buy a home, the requirements are even more strict when applying for a piggyback loan— making it that much more important to have your financial ducks in a row.

Final Word

Piggyback loans might not be the most straight-forward financing package out there, but for the right home buyer— they can make all the difference in the world. Sit down and take a good hard look at your finances to decide if borrowing a piggyback loan might be able to help you reach your financial goals. And if the answer is no, don’t worry— there are a lot of other options that can help you afford your dream home.

Contributor Larissa Runkle specializes in finance, real estate and lifestyle topics.

Source: thepennyhoarder.com

This is What Every Millennial Should do Before Buying a House

Can you see a white picket fence in your near future? Then take 90 seconds to sign up for a free Credit Sesame account. The sooner you get started, the closer you’ll be to your goal of a good credit score — and homeownership.
Owning a home is no small feat — especially after the financial apocalypse and dismal job market millennials have persevered through. Twice.
In two minutes, you can sign up for a free Credit Sesame account and get personalized tips on how to improve your score. You’ll also be able to see any of your debt-carrying accounts, plus any marks or errors holding you back (it’s more common than you’d think).
Ready to stop worrying about money?
Without a good credit score, getting approved for a mortgage is going to be tough. And getting a decent interest rate is going to be even harder — meaning a homeowner could be paying tens of thousands of dollars more for their home than someone with excellent credit. Yikes.
So for millennials ready to take the next big step in their life and stake a claim on a piece of property, make sure your credit is on track. Credit Sesame can help you bump it up — making homeownership more attainable.
How did they do it? Well, everyone follows a different path to homeownership — but there is one thing most home-owning millennials have in common: a good credit score.
Source: thepennyhoarder.com
Privacy Policy <!–

–>


And yet, despite all odds, millennials are now the biggest group of homeowners in the United States, according to 2020 research by the National Association of Realtors.

Beg, Borrow or Save: Coming Up With a Down Payment

In this article:

How much you’re required to put down on a house is determined by the type of loan you get, but it generally ranges from 3% to 20% of the purchase price of the home. Beyond lender requirements, it can be financially beneficial to increase your down payment to reduce the amount of your monthly mortgage payment. Offers with larger down payments can be more appealing to home sellers who are looking for buyers with a low risk of financing issues that could delay the sale – or worse, have it fall through.

What is a down payment on a house?

The down payment on a house is a portion of the cost of a home that’s paid in cash. The balance of the purchase price is usually paid by a loan you secure from a lender and pay back in a monthly mortgage payment. Down payments are expressed as a percentage of the total purchase price and the percentage you’re required to pay is dictated by the terms of your loan. Note that not all home buyers with financing are required to produce a down payment.

How much to put down on a house?

The ideal down payment amount is 20% of the purchase price of the home. Paying 20% up front reduces your monthly mortgage payments, can eliminate costly private mortgage insurance (PMI), can reduce interest rates and improves the competitive nature of your offer.

When trying to decide how much you should put down on a home, play around with a mortgage calculator to determine an amount that works best for your finances. As you explore, remember that in addition to your down payment, you’ll have some other up-front costs you’ll need to pay at closing, collectively called your escrow funds. It can include your closing costs, prorated taxes, title fees and more.

20% down reduces mortgage payment

The more money you pay upfront, the less you have to borrow from the lender, and the lower your monthly payment will be.

Example: Let’s say you buy a $300,000 home at a fixed rate of 4.25%.

  • With a 20% down payment ($60,000), you’d borrow $240,000, and your monthly payment would be $1,548.
  • With a 5% down payment ($15,000), you’d borrow $285,000, and your monthly payment would be $1,950.

20% down eliminates private mortgage insurance (PMI)

When you put 20% down, that means you own 20% of your home. This allows you to avoid paying PMI, which is a monthly charge that’s rolled into your mortgage payment to protect the lender from what they see as a riskier loan.

Example: If you buy the same $300,000 home noted above, with 5% down, your PMI payments each month would be $181 until you own 20% of the home and refinance into a loan without PMI.

mortgage payment breakdown based on down payment of 5% or 20%

Example of the benefits of putting 20% down on a $300,000 home purchase with a 4.25% interest rate on a 30-year fixed mortgage.

20% down improves mortgage rates

Buyers purchasing with a 20% down payment can often get better interest rates. A higher down payment is considered a sign that you’re financially stable, and thus a less risky borrower in the eyes of your lender. Overall, your risk is determined by three key factors: your debt-to-income ratio, your credit score and your loan-to-value ratio. The more money you put down as part of your down payment, the stronger your loan-to-value ratio.

For example, if you borrow $240,000 on a home that’s worth $300,000, like our example above, you have a loan-to-value (LTV) ratio of 80%, or $240,000 divided by $300,000. The lower the percentage, the better.

20% down makes your offer more appealing to the seller

In a competitive market, a larger down payment can make your offer more appealing to a seller, as they feel confident that you won’t have financing issues at closing that could cause the sale to fail.

What is the average down payment on a house?

The typical down payment on a mortgaged home in 2019 was 10-19% of the purchase price of the home. While 20% is the traditional down payment amount, 56% of buyers put down less than 20%, according to the Zillow Group Consumer Housing Trends Report 2019.

Here’s a breakdown of down payment percentages from buyers who purchased homes with a mortgage in 2019:

  • 20% of buyers have a down payment of more than 20%
  • 19% of buyers have a down payment of 20%
  • 21% of buyers have a down payment of 10-19%
  • 9% of buyers have a down payment of 6-9%
  • 17% of buyers have a down payment of 3-5%
  • 10% of buyers have a down payment of less than 3%
  • 5% of buyers don’t remember the size of their down payment

Younger buyers are more likely to purchase a home with less than 20% down. Sixty-two percent of Gen Z and Millennial buyers make a down payment of less than 20%. And 60% of Gen Xers do the same. Far fewer Boomers and Silent Generation buyers put down less than 20% down, just 42%.

What is the minimum down payment for a house?

The minimum down payment for a house depends on the loan you’re using to finance the purchase. Some people may be able to qualify for loans with 0% down, but loans with 3% down or 3.5% down are common. Lower down payment loans, including the 3.5% FHA loan, are designed to make homeownership more attainable for first-time buyers.

Keep in mind that even if you finance with a loan that allows a lower down payment, you’ll usually still have to pay closing costs out of pocket. There are a few 0% down loan types that will roll all costs into the mortgage, but they can be hard to come by.

  • Conventional loan minimum down payment: 3%
  • FHA loan minimum down payment: 3.5%
  • VA loan minimum down payment: 0%
  • USDA loan minimum down payment: 0%

What are the zero-down payment mortgage options?

For most zero-down payment home loans, there are certain criteria buyers have to meet, and many people don’t qualify. Certain groups like health care workers, educators, protectors, veterans and households with disabled members can qualify for specific programs. Requirements vary, but many of these programs are available to first-time buyers or those who haven’t owned a home for at least the past three years. The home they’re buying usually has to be their primary residence, too.

Down payment assistance program: These programs allow buyers to take out a second mortgage to cover the cost of their down payment, sometimes with benefits such as zero percent interest and deferred payments. These programs are usually run by government agencies or nonprofits.

Below-market first mortgages: Also known as first-time home buyer programs, these are below-market interest rates with reduced closing costs or fees. They’re typically funded by state housing finance agencies as a way to help lower up-front and ongoing costs for first-time buyers.

Tax credit or mortgage credit certificate (MCC): The MCC is a tax credit that allows first-time home buyers to offset a portion of their mortgage interest, up to $2,000 per year, which also helps buyers qualify for a loan because it counts toward monthly income.

For more information about down payment options, read about the benefits and find resources in the Mortgage Learning Center.

If you’re concerned about applying too much of your savings on a down payment and not having enough cash for costly home repairs, consider buying a Zillow-owned home. Our properties are evaluated, repaired and brought to market as move-in ready homes.

How to save for a down payment on a house

Saving enough for a down payment can be one of the biggest hurdles to homeownership. According to the Zillow Group Report, 22% of buyers said saving for a down payment is difficult or very difficult. And, it can take a long time. Buying a roughly $220,000 home and saving about 10% of the median annual income, buyers today need more than 7 years to save a 20% down payment.

Most buyers save the traditional way, tucking away a little money from each paycheck, and 55% of buyers say they made some kind of financial sacrifice to buy their home.

how the average home buyer sources their down payment

Saving strategies

Minimize your life: Take a look at your spending and belongings with a critical eye. Do you have unused belongings you could sell? Perhaps empty out that storage unit to avoid the monthly charge?

Spend less: Cutting back on indulgences like dining out, cable TV or coffee shop drinks. Twenty-five percent of buyers say they reduced their spending on entertainment to afford their home purchase, and 16% report postponing or canceling vacation plans.

Earn more: Eighteen percent of buyers picked up additional work to buy their home, whether that is starting a side hustle, taking on extra shifts at work or reducing time off.

Ask for help: Buyers also ask friends and family for assistance, even using birthday cash or wedding money as part of their down payment. Thirty-four percent of buyers with a mortgage report using a gift or a loan from friends and/or family for their down payment, accounting for 15% of the average mortgage buyer’s down payment.

First-time home buyer down payments

According to the Zillow Group Report, almost half of all home buyers (45%) are first-time buyers. While most repeat buyers can apply the equity from the home they’re selling to their new home, it’s more challenging for first-time home buyers to get the money they need to secure a down payment.

This may be why using gifts or loans from friends and/or family is more common among first-time mortgage buyers at (43% report using it for at least a portion of their down payment).

Down payment gift rules

If you’re planning on using gifted money as part or all of your down payment, it’s important to realize that there are restrictions and documentation requirements.

First, your lender will need to know the source of your down payment money. Expect your lender to evaluate your past 3+ months of banking activity. Keep a paper trail of any large transfers so you can accurately account for any deposits that occur during this time period.

Your lender will also want to confirm that the money you’ve been gifted is in fact a gift, and isn’t a loan from a friend or family member that’s expected to be paid back. Additional loans affect your debt-to-income ratio and potentially make you a riskier borrower. Here are the things your lender will look for:

Relationship of gifter: Generally, gift money needs to come from a family member, spouse or partner.

Down payment gift letter: Lenders will often require that the donor write a letter that clarifies your relationship, documents the amount of the gift and the source of the gift, confirms contact information, and documents the address of the property. It also should document that the gift is a gift, and not actually a loan.

Gift money loan requirements: Not all loan types will allow you to make a down payment with 100% gift funds, especially if the home will not be a primary residence. Check with your lender to confirm the minimum borrower contribution from your personal funds for the home you plan to buy.

Source: zillow.com

5 Mortgage Misconceptions Set Straight

Looking for a home loan? Get your facts straight so you can proceed with confidence.

Getting a mortgage can be a breeze or a slog, depending on what you know about the process. To get organized and set your expectations properly, let’s debunk some common mortgage myths.

1. Lenders use your best credit scores

If you’re applying for a mortgage jointly with a co-borrower, logic suggests that your lender would use the highest credit score between both of you.

However, lenders take the middle of three credit scores (from Equifax, TransUnion and Experian) for each borrower, and then use the lowest score between both borrowers’ “middle scores.”

So, if you had a middle score of 780, and your co-borrower had a middle score of 660, most lenders would qualify and approve you using the 660 credit score.

Rates are tied to credit scores, so in this example, your rate would be based on the 660 credit score, which would push your rate up significantly — or potentially even make you ineligible for the loan.

There are exceptions to this lowest-case-credit-score rule. Most notably, if you have the higher credit score and are also the higher earner, some lenders will allow your higher credit score on the file — but this is mostly for jumbo loans above $417,000.

Ask your lender about exceptions if you have credit score disparity between co-borrowers, but know that these exceptions are rare.

2. The rate you’re quoted is the rate you’ll get

Unless you’re locking in a rate at the moment it’s quoted, that rate quote can change. Rates are tied to daily trading of mortgage bonds, so most lenders’ rates change throughout each day.

Refinancers can often lock a rate when it’s quoted — as long as you’ve given your lender enough information and documentation to determine if you qualify for the quoted rate.

You typically receive a quote when you’re beginning your pre-approval process, but a rate lock runs with a borrower and a property. So until you’ve found a home to buy, you can’t lock your rate. And while you’re home shopping, rates will be changing daily, so you’ll need updated quotes from your lender throughout your home shopping process.

Rate quotes also come with an annual percentage rate (APR), which is a federally required disclosure that shows what your rate would be if all loan fees are incorporated into the rate.

This can make you think that APR is the rate you’ll get, but your loan payment will always be based on your locked rate, and the APR is just a disclosure to help you understand fees.

3. Fixed-rate mortgages are always better than adjustable-rate mortgages

After the 2008 financial crisis, many borrowers started preferring 30-year fixed loans. For good reason too: The rate and payment on a 30-year fixed loan can never change. But the longer the rate is fixed for, the higher the rate.

So before settling on a 30-year fixed, ask yourself this question: How long am I going to own this home (or keep the loan) for?

Suppose the answer is five years. If you got a five-year adjustable rate mortgage (ARM) instead of a 30-year fixed, your rate would be about .875 percent lower. On a $200,000 loan, you’d save $146 per month in interest by taking the five-year ARM. On a $600,000 loan, the monthly interest cost savings is $438.

To optimize your home financing, peg the loan term as closely as you can to your expected time horizon in the home.

4. Real estate agents don’t care which lender you use

A federal law enacted in 1974 called the Real Estate Settlement Procedures Act (RESPA) prohibits lenders and real estate agents from paying each other fees to refer customers to each other. So as a mortgage shopper, you’re always free to use any lender you choose.

But real estate agents who would represent you as a buyer do care which lender you use. They’ll often suggest that you use a local lender who’s experienced with your area’s nuances, such as local taxation rules, settlement procedures and appraisal methodologies.

These areas are all part of the loan process and can delay or kill deals if a nonlocal lender isn’t experienced enough to handle them.

Likewise, real estate agents representing sellers on homes you’re interested in will often prioritize purchase offers based on the quality of loan approvals. Local lenders who are known and respected by listing agents give your purchase offers more credibility.

5. Mortgage insurance is always required if you put less than 20 percent down

Mortgage insurance is a lender-risk premium placed on many home loans when you’re putting less than 20 percent down. In short, it means your total monthly housing cost is higher. But you can buy a home with less than 20 percent down and avoid mortgage insurance.

The most common way to do this is with a combination first and second mortgage — often called a piggyback — where the first mortgage is capped at 80 percent of the home’s value, and the second mortgage is for the balance of what you want to finance.

Related:

Originally published January 12, 2016.

Source: zillow.com

What Is a Mortgage and How Does It Work?

Perhaps the most intimidating part of buying a home is applying for a mortgage. You may know exactly what “APR,” “points” and “fixed-rate” mean — but if this is your first home, or you just need a refresher, there are a lot of great resources to get you up to speed so you can be a well-prepared mortgage shopper. And because this is such a crucial part of owning a home, we’re going to break it all down.

What exactly is a mortgage?

It’s a loan with your house and land used as collateral. If you don’t pay back the loan, the lender will foreclose. That doesn’t mean the bank owns the house until you pay it off. It means they’ve got a lien against the property. A lien is the right to take possession of someone else’s property, in this case your home, until a debt is paid off. So you really are a homeowner even if you have a mortgage. You just own a home with a lien. Zillow’s Mortgage Learning Center offers extensive information about mortgages and is a great resource for anyone in the market for a home loan.

I can borrow as much as I want, right?

This seemed to be the thinking a few years ago, and things didn’t turn out very well. When you borrow more than you can realistically pay, that’s a sub-prime mortgage. Banks sold a lot of those to people who assumed the housing market would keep rising like gangbusters. Their home values would go up, giving them nearly instant equity and they could refinance quickly at a lower rate or sell the home for a quick profit. Lenders sold these loan products because they were making the same bet, and interest rates are always higher on sub-prime loans. Even if some ended up in foreclosure, the lenders would still make a tidy profit. Unfortunately, it was a bad bet for almost everyone.

As the housing market shows more upward movement, the temptation to borrow more than you can afford becomes enticing. That’s why it’s important to really look at how much you can spend. Your mortgage payment should be comfortable even if it’s a stretch, not a weight that drags you down each month. The lender will look at your income, debt and savings, and is required by federal regulation to demonstrate your ability to repay a loan. So while that determines how much you can borrow, it isn’t necessarily what you can afford.

You can find a lender on Zillow to learn how much you can borrow. And you can use Zillow’s affordability calculator to estimate what you can afford.  But you should go a step further and figure out what you can be comfortable with. Is travel a passion? Do you like spending a fair amount on dining out or other entertainment? The lender won’t factor biannual vacations or a craving for high-end restaurants into their calculations, so you have to. Fortunately, that’s easy enough with tools that help you calculate your monthly payment as well as estimate what you should be able to afford given your existing income and debts. Chances are, even after the sub-prime crisis, a lender will be willing to offer you a bigger mortgage than you think you can afford. Only you can know how much you are willing to set aside for a mortgage payment each month.

How do I know if I’ll even qualify for a mortgage?

A few years ago (see above), if you were breathing it seemed like you could find a mortgage. Things are a little bit tighter now. The biggest factor is your debt to income ratio. It’s your minimum monthly debt divided by your monthly income. But don’t worry. You don’t have to do the math! There’s a handy DTI calculator that will figure it out for you and estimate how much you’re likely to qualify for.

What’s a good credit score?

Zillow ‘s Mortgage Learning Center has a lot of great information about credit scores and how to improve them. But here’s a crash course. FICO credit scores range from 300 to 850.

Here’s a quick guide to determine how your credit score ranks:
Excellent credit = 720 and above
Good credit = 660 to 719
Fair credit = 620 to 659
Poor/bad credit = 619 and below

The higher the score, the lower the interest rate. Your credit history makes up the largest part of your credit score (35 percent) so making payments on time each month will go far in helping your credit score.

So many kinds of mortgages! What’s best?

That depends of you and your goals for this purchase. Is this the house you plan to stay in forever? Is it a starter home you plan on selling to trade up in five years? How long you think you’ll stay in a home will help you decide between fixed- and adjustable-rate mortgages. It will also help you decide whether to focus on interest rate or points.

What’s better: Fixed or adjustable?

If you plan on staying put until the mortgage is paid off, a fixed-rate loan will give you stability. The interest rate is a little higher than an adjustable-rate mortgage (ARM). But it won’t go up like an ARM can. The only things that will change your house payment over time are property taxes and insurance rates, but those will change regardless of which type of loan you get.

On the other hand, if you know you will be selling in the not-too-distant future, the lower interest rate that comes with an ARM might make sense. Even if rates jump in a few years, you’ll be selling anyway so it won’t impact you. You can also select a hybrid ARM that is fixed for a certain number of years (3, 5, 7 or 10) then adjusts annually for the remainder of the loan. The risk with an ARM is that if you don’t sell, your payments may go up and you may not be able to refinance.

What are points?

A point is equal to 1 percent of your loan. The lender may offer to sell you points in exchange for a lower interest rate. Note: A point does not equal a percentage rate drop in interest rate. The lender will tell you how much a point will drop the rate. You can usually buy points in one-quarter increments.

So when does it make sense to buy points? Again, how long you plan to keep the mortgage will determine this. If you plan on moving in a few years, buying points to get a better interest rate may not make sense because you won’t recoup the initial investment.

If you plan on staying in the home without refinancing anytime soon, points might make sense. You have to make the choice between lower interest rates over the life of the loan or no points up front. Compare offers to see what makes sense to you.

In general, it doesn’t make sense to pay more than 1 to 1 1/2 points to a lender. If you are dealing with bad credit, a complex loan or a killer interest rate, you might pay up to 2 percent.

What’s a good interest rate?

Oftentimes, rates you see in advertisements online aren’t necessarily for the loans you qualify for. So you’ll need to investigate. Interest rates vary by location and can change daily. And they vary depending on your specific financial picture, such as income, credit score, and debts.  A good place to get an idea of what rates are available to you right now is to search for interest rates on Zillow. You can get free quotes anonymously, based on your specific financial picture, so you don’t have to worry about being hassled. You’ll also be able to see mortgage rates from multiple lenders so you can easily compare rates.

Why is the percentage different from the APR?

The annual percentage rate (APR) includes fees and points to arrive at an effective annual rate. Because different lenders charge different fees and structure loans differently, the APR is the best way to compare what each lender is offering. For example, Lender A may offer you an astounding 2.0 percent interest rate that sounds far better than Lender B’s 3.5 percent. But Lender A is including points and exorbitant fees. So the APR, or what you’ll really be paying could be higher for Lender A even though the interest rate is lower. APR helps you compare apples to apples.

What’s amortization and should I care about it?

Amortization is what you are actually paying per year against your loan. You can get a mortgage with a term of 10, 15 or 30 years. You pay each month and the principal decreases until it’s paid off. The payments don’t change but at the beginning of the term, most of the payment is going toward interest. By the end of the term, that’s flipped and you’ll be paying down the mortgage principal.

An amortization calculator will help you see exactly how different loan terms impact your payment schedule and how much you pay in interest depending upon the term of the loan.

Note: If you pay half your house payment every two weeks instead of one monthly payment, you’ll end up saving money on your loan. You’ll wind up paying 26 payments per year, one more payment annually than if you just paid monthly. The re-amortized loan will eventually result in more of the payment paid on principal and less on interest. The extra payments go to pay down the principal on the loan.

Prepayment penalties: Is this really a thing?

Paying off debt is always a good thing, unless there are prepayment penalties. Some lenders actually charge you a penalty if you pay off early. The penalties generally apply for a specific period of time, usually between one and three years after the loan is originated.

Why would anyone get a loan with a prepayment penalty? Some lenders offer very low (and therefore tempting) interest rates in exchange. Also, some borrowers agree to loans with penalties if they have bad credit and it’s the only way they can get the loan. Mostly, a prepayment penalty is a financial decision. There are situations where accepting a prepayment penalty on a loan can save you thousands of dollars in interest.

What’s PMI?

It’s short for private mortgage insurance. It’s usually required if you put less than 20 percent down on your house, and it protects the lender in case you default. The cost varies, as do the methods to get rid of the PMI once you have 20 percent equity in your home. Government loan programs, such as FHA or VA loans, are backed by the government rather than PMI. There is no monthly mortgage insurance on VA loans, however you will have monthly mortgage insurance on a new FHA loan.

Source: zillow.com