Where to Find Money for Your Down Payment

Love Buying a Home Series – Week 5 My step-by-step series will take you through the entire home-buying process — from finding a buyer’s agent to settlement day, and all the details in between. Every first-time buyer will find this information-packed series easy to follow and understand. Make sure to tune in for the next few weeks! Coming up with a lump sum of money for a down payment can be scary and daunting to many first-time buyers. You definitely don’t want to wipe out your entire savings to purchase a home. It doesn’t have to be a roadblock to homeownership! Once you’ve got your monthly budget all set and know approximately how much home you can really afford (see the fourth article in this series), the next step is dealing with your down payment.  Here’s some guidance on where you can find cash for your down payment and also a rundown of some great homebuyer assistance programs that can help reduce the amount taken out of your own pocket. How Much Down? How much money you need for a down payment can depend on the type of mortgage you will get for your financing. Lenders of conventional loans may require 3, 5, 10 or 20% down, depending on your credit and other factors affecting your financial picture. FHA loans can require as little as 3.5% down. If you are a veteran, you can put 0 down! However, the amount you put down really depends on YOU.  If you’re a first-time buyer, don’t put all of your savings into your house. You may need some of that cash once you’re a homeowner.  Instead, put down just enough to buy the house and get a monthly payment that works for your budget right now. These days, you don’t have to put 20% down to avoid paying monthly Private Mortgage Insurance (PMI).  Monthly PMI is typically not tax deductible (check with your tax advisor since it depends on your situation), so most people want to avoid it.  A smart strategy for first-time buyers -- who don’t have 20% down OR who don’t qualify for a first-time homebuyer program that helps get them to 20% down -- is to have your lender increase your interest rate just slightly. This small increase will hardly change your monthly payment but is enough to avoid the “risk” of PMI or the PMI becomes tax deductible. Once you narrow down your mortgage options and take into account any homebuyer assistance programs, you’ll have a better idea of how much you’ll actually need for your down payment. Next week you’ll learn to sort through all the mortgage options out there so stay tuned for that! Here’s a rundown of where to find money for your down payment: Help from Homebuyer Assistance Programs As a first-time homebuyer, you may qualify for many of the state and local assistance programs out there, many of which could help cover some of your down payment and/or closing costs. Plus, several lenders also offer grant programs that can also help with down payment and closing costs. If you’re a first-time buyer with a moderate income, you should look into these programs before you consider other options … it’s like free money toward your purchase!  For instance, many assistance programs could be a good match for you and your circumstances. Definitely make it a priority if you’re a state, country or city employee since many local jurisdictions want to make it possible for you to work and live in the same community. I can give you a complete update of current programs out there for first-time buyers. Don’t hesitate to contact me. Should You Tap into Your Retirement Accounts? You may have a nest egg of cash that you thought was off limits! These options below may not be the best choice for you, but they are something to consider if funds are needed. Keep in mind, you will need to follow some set rules to access this money, and should always consult with an advisor to clearly understand any tax implications. Borrow From Your 401(k) Plan. Check with your employer to see if your 401(k) plan allows for loans. If you have less than $20,000 in the account, you can borrow the amount of your vested balance but no more than $10,000. (The maximum loan amount under the law is the lesser of one-half of your vested balance in the plan or $50,000.) Remember if you leave or lose your job, you may have to pay back the entire amount in 60 days or sooner. So be sure you understand any tax consequences, penalties and charges as well as repayment terms. Withdraw Funds From Your IRA. Usually, money in an IRA can't be withdrawn before age 59 ½ without incurring a 10% penalty. However, you have no worries about a penalty if you’re a first-time buyer or someone who hasn't owned a principal residence for two years prior to signing a binding sales contract. You can withdraw up to $10,000 penalty-free from an IRA for a down payment if you meet these requirements. If you and your spouse are both first-time buyers, each of you may pull from your retirement accounts, giving you a total of $20,000 in cash. Keep in mind, any withdrawals from a traditional IRA must be reported as income and taxes must be paid. This $10,000 is a lifetime limit -- and must be used within 120 days of receiving it. Withdraw Funds From Roth IRA. The rules are a bit different if your nest egg is in a Roth IRA. The $10,000 you take out for your first home is a qualified distribution as long as you've had your Roth account for five years. This means you can take out your retirement money without penalty, and because Roth earnings are tax-free, you'll have no IRS bill either. Reach Out to Friends and Family You might be reluctant to ask your family, but they can be a great source for your down payment. You will need to decide if this is a gift or a loan. Your parents might have done the same thing when they bought their first house! Gift from Family. Immediate family will often help with home purchases. Gifts up to $19,000 per year per person can be given without worrying about the gift tax. This means, for example, that every year your mother and father can give you and your spouse a total of $76,000 without having to file a gift tax return. Documentation is required so you need a letter stating that the money is indeed a gift with no expectation of repayment. Borrow from Family or Friends. You may prefer to ask for a loan rather than a gift from a loved one. However, your lender needs to know if you are borrowing from family or friends since they will consider this an additional debt for you. The lender will factor this additional debt into its own decision on whether to loan you money. Boost Your Savings This is one area where you have some control over and should start making an effort as soon as you even begin thinking about buying a home. The earlier you start, the more you can increase your personal savings. Tax Refund. Consider changing your withholding exemptions from 1 to zero. Your paycheck will be reduced but you’ll get a bigger check at tax time to use toward your down payment. That way you won’t use the money up during the year and will have a big chunk at the end. Deposit $$ in Bank Regularly. You’ve probably heard this before, but it does work: Get into the habit of putting the same amount of money into your savings after every paycheck. If you get paid every two weeks and save $200 from every paycheck, you will have saved more than $5,200 after 12 months. Not bad! Sell Stuff on eBay or Craigslist. Everyone has unwanted items that take up space. Consider selling these items and put that money toward your down payment. Getting a mortgage these days, especially for your first home, is definitely not “one-size-fits-all” these days.  Email me so we can set up a time to talk through the options and narrow them down to which one or ones are best for you and your particular financial situation and goals. Next week get all the details in the Five Steps to Obtaining a Mortgage.

Do the Math – A Mortgage You Can Afford

Love Buying a Home Series – Week 4 My step-by-step series will take you through the entire home-buying process — from finding a buyer’s agent to settlement day, and all the details in between. Every first-time buyer will find this information-packed series easy to follow and understand. Make sure to tune in for the next few weeks! One of the biggest mistakes you can make as a homebuyer is not knowing how much you can REALLY afford when purchasing a home. The next mistake is thinking too “big picture” when it comes to price range or purchase price. Stop right here before you make these mistakes! You’re going to learn the correct way to do the math so that you get a mortgage you can afford and, ultimately, a home you absolutely love on your budget. You won’t be “house poor” and you won’t shortchange yourself either. Here’s how: Think monthly payments first and foremost. First and foremost, you don’t want to focus solely on the purchase price, but rather first start with your desired monthly payment for your home. This monthly payment should factor in your taxes and insurance (but not utilities and general monthly maintenance). We call this our Mortgage Rule of Thumb. It may seem backwards but it’s the one and only way to make sure you get the house you want for the price you want. Here’s why. Even if the purchase price is exactly the same, your monthly payment could be very different between two properties. For example, the monthly payments for a $500,000 condo will be completely different than for a $500,000 single-family home. There are different costs you’d need to consider for each option, such as condo fees.  That’s why you should NOT focus on the purchase price first since monthly payments can vary depending on where and what you buy. So never begin your search with a blanket statement, “I want to spend $500,000,” and not even know whether that amount will truly fit your monthly budget. Don’t just accept what lenders say you can afford. Unfortunately, many buyers start with that blanket statement of price because their lender pre-approved that amount for them. Don’t think you’ve hit the jackpot, since many lenders will approve a mortgage for you that could be way more than you are comfortable spending per month. Many clients will say, “I’ve been approved for $500,000 by my lender,” but when you dig a little deeper, these clients actually want to spend a lot less in order to get the payments they truly want to commit to each month. Lenders will approve you for the highest purchase price possible based on several “big picture” financial factors, but it doesn’t really keep in mind what YOU want to pay per month on a home. Work backward to determine the “correct” purchase price for you. First, you need to figure out how much you want to pay per month, and then you’ll need to work backward to determine a purchase price that works with this monthly budget. Yes, it does seem backward at first, but it works! Once you know how much you want your monthly housing payments to be per month, you can then factor in your down payment and any homebuyer assistance programs. You’ll also need to include other potential costs of owning a home – taxes, insurance, condo fees – that will affect your monthly budget. With all these factors in mind, we can then help you figure out the correct price range to shop in. Keep in mind, every $10,000 in purchase price only adds an additional $50 to your monthly payment.  Similarly, the same goes for your down payment: Every additional $10K you put down, you are only saving yourself about $50 per month. So don’t feel you have to save for years for additional down-payment funds in order to afford a home.  And remember that there are some great options to help with your down payment. Take a look at your budget to determine what you want to pay per month. So now that you know to work backward, how do you determine what you want to spend per month when you own a home? It’s time to make a budget! Making a budget is an important step, so be honest about what you spend your money on each month now, what you’re willing to forgo, and what you expect in the future. Here’s what to include and consider when determining your budget: List all the costs of homeownership — property taxes, mortgage insurance, home insurance, maintenance, utilities, and condo fees, parking fees, if applicable. I can help with estimates! List all other expenses you expect to continue — such as gym memberships, day care payments, car loans, school loans, gas or commuting fees, etc. Estimate yearly maintenance costs for a home. Plan to spend or save about 1% of your home’s purchase price each year. So, if you buy a $300,000 condo, you should be putting about $3,000 per year into the home for maintenance or into a savings account for when you need to replace something in the future! Include any tax advantages you’ll get as a homeowner. You’ll have deductions or equity in your home and can expect a larger refund that could go toward your savings. Consider additional expenses, beyond your mortgage payment and maintenance costs. Decorating costs such as new furniture purchases can add up in the early years of homeownership. What expenses are “mandatory” for your life and general happiness?  Ask yourself some hard questions about your lifestyle now and for the future, and how that could impact your budget. For example, if you love to travel, then don’t buy a home that makes it impossible to go on a trip for years! That would not be worth it. What expenses could you tighten-up on to get the home you want?  If you rarely drive your car and are willing to take mass transit or bike everywhere in your new home, then that’s where you could cut some of your monthly expenses. You could then possibly afford to buy a home in the location you want. Remember that but how much you can afford today can change next year and after that. Yes, your salary will increase but you’ll have new costs, such as kids or a new car.  This is when you do want to look at the “big picture” of your life now and down the road Finish up the math to get an idea of how much you can afford. Owning a home is about one-third more in cost than your current rent payment without changing your lifestyle. You can get a very rough estimate on what you can comfortably afford by using your current rental cost situation. Multiply your current rent by 1.33 to arrive at a mortgage payment that won’t bust your budget. This calculation takes into account the tax benefits of homeownership that can offset some of those additional homeownership costs. For example, if you currently pay $1,500 per month in rent, you should be able to comfortably afford a $2,000 monthly mortgage payment after factoring in the tax benefits of homeownership. Don’t hesitate to contact me if you have any questions about calculating a monthly budget. It’s an important first step before you start looking at homes. Once you know your monthly budget, other steps will neatly follow. You’ll be able to determine your price range and then be able to work with your lender on available mortgage products along with any down-payment options. Next up in this Love Buying a Home Series is Where to Find Money for a Down Payment. Every buyer needs to be prepared for this and this article can show you how!

How Your Needs and Desires Lead to “Home Sweet Home”

Love Buying a Home – Week 3 My step-by-step series will take you through the entire home-buying process — from finding a buyer’s agent to settlement day, and even to maintaining your home after you’re all moved in. Every first-time buyer will find this information-packed series easy to follow and understand. Make sure to tune in for the next few weeks! Before you start looking for a home you must first define and choose the type of life you want to live. Your answers to the questions below will help make sure that your real estate decisions and the home you buy will match this life you want.  You’re the one who will be living in this home every single day, living in this neighborhood, and living this lifestyle day in and day out. Is it the right fit for you and your family? I want you to be happy with all of it, and that starts with what YOU want.  Some Self-Analysis That Digs Deeper Your self-analysis at the very start should hopefully lead you to the right home purchase for you and your lifestyle (and yes, budget!).  Most real estate agents don’t approach home buying this way.  It’s important to ask yourself questions that dig deeper than the traditional “How many bedrooms you would like in a home?” questions. These more revealing questions that delve into detailed aspects of your needs and desires give you the opportunity to think carefully about what you want this next step in your life to be like. Your honest answers to these questions are what should drive your home search.  This is NOT silly fluff!!  Your answers to these questions below will help you avoid a personal and financial disaster when it comes to real estate. Questions You Need to Ask Yourself Sit yourself down and take the time to carefully think over your answers to the questions and topics below. Do this first step before you go any further in your search for a home: Time — If you first decide how long you plan on living in this next home, then you can understand what purpose your home will serve, and everything else falls into place.  Questions like how many bedrooms and if schools are important become very easy to answer if you base them on how long you plan on living in this next home.  • How long do you plan on living in this home?  • What plans do you have during that time period and how will these affect your home needs, such as space for children or a growing family? Location for a job or school? • What is the ideal time frame for purchasing this home? Do you have a specific deadline? Why is this timing important? Are you willing to wait longer if the market’s timing for your home is not the same as your ideal timing? Daily Life — You may not realize it, but it’s the little habits that make a big difference. • What about your current daily life do you love and are not willing to give up? For example, do you love being able to walk or bike to work? Do you love going to your local coffee house every day? Do you like to go for runs outside? Do you like to garden? What is your actual reality? • Are you a home body? Do you love having people over and would love to have the space for entertaining at home? • Are you out every night? Do you love to be near restaurants, theaters, or close to more vibrant areas? Do you hate crowds, busy streets and traffic? Do you see that changing at any point during your timeframe for living in your next home? • Do you work late and need to be close to the office or have a quick, easy commute? • How important is a car and/or parking space to you? Do you want a car-free life where you can walk or bike everywhere; or at least get an Uber or Lift? Or you can’t imagine your life without owning a car. • When and where do you feel most happy and engaged during your day? What frustrates you most each day? Personal Goals – You don’t want to sacrifice your goals or outside pursuits once you’re homeowner, so make sure you include them in your decision making. • What are your personal goals and how will these impact your home needs or budget? For example, do you plan to change jobs at some point and your finances may change – a possible increase or decrease in salary? • Do you want to work from home eventually or start your own business and may need space for an office and supplies? • Would you prefer to live in a less expensive, possibly smaller, home so you have the funds to travel the world or for a favorite hobby? Location – Where you live will affect everything about your lifestyle – from whether it has urban conveniences, lots of quiet green space, or even the types of homes available to buy – condo apartment, row house, townhome, or single-family home. • Do you consider yourself a “location person” or a “house person”? Do you get more excited about the local amenities or the features inside your house? Usually people tend to be more one than the other. Which are you? • What is your ideal location and why? • Where do you commute to and what is your preferred method of getting there?  Would you prefer to have a longer commute to get more space? Or, do you want to live in the middle of a more urban community and possibly have less living space? • Are schools in the neighborhood a factor for this home purchase?  • Do you feel the need for green space, lots of trees, more open space, less buildings and streets, and not having neighbors’ homes too close to yours? Do you love to garden or want a large backyard for children or dogs? Or is a playground or dog park nearby sufficient? Yes, Please and Never Again! –   Some things you’re excited to actually have as a homeowner, but maybe there are some amenities in the past that you thought you’d love but never did or never used. • What about your current home would you like to change or be different in your next home? (Or what absolutely bothers you every day in your current home or rental?) Do you want: Bigger closets? Less noise? More amenities nearby? Office space? More convenient shopping options? More modern and sleek features? More historic or vintage home? • What is the absolute most important, can’t-live-without it, deal breaker thing you MUST have? (We all have one.) Do you really, really want that master bedroom suite or that large eat-in kitchen? What can you compromise in a home? • Describe your ideal scenario when it comes to your home purchase and why. Pat yourself on the back for taking the time to carefully go through these questions. Your answers will provide some important insights on where you want to go with your life and your expectations for your new home. If you are having a hard time answering these questions, let’s meet up and talk through them.  I can help give you some homework to help you gain clarity or give you my perspective on the options you have to choose from.  Simply email me and we can find a time to get together. Look out for the next article in this weekly series, Love Buying a Home series. The next step is all about knowing your budget and how to correctly figure it out so you’re not house poor or cutting yourself short. You don’t want to miss this one — Do the Math – A Mortgage You Can Afford.

Choosing The Very Best Buyer’s Agent for YOUR Unique Home Search

Love Buying a Home Series This step-by-step series will take you through the entire home-buying process — from finding a buyer’s agent to settlement day, and even to maintaining your home after you’re all moved in. Every first-time buyer will find this information-packed series easy to follow and understand. Make sure to tune in for the next few weeks! The first item on the agenda when you’re looking to buy a home is to choose a real estate agent that is the best person to represent you, and also someone that can help you through every single one of the many steps in buying a home.  You will be spending a lot of time with this person, so make sure it’s someone that’s right for you and your specific home buying needs and goals. Keep these 10 factors in mind when you start considering agents: 1. Recommended by friends, family, and co-workers. They’ll give you honest, unfiltered feedback on what they went through and if they’d go with the same agent again (a key sign!). After you get your tribe’s feedback, first check out an agent’s website to see if they are still active and also passionate about working with buyers like you. Some agents focus on a particular price range (such as a high-end market) or neighborhoods, so even a great agent for your friend may not work for you because of your different needs and budget. Remember, you don’t have to go with the first agent you meet.  Just like when you choose a doctor or other important advisors in your life, you want to check around first and see if this is the best choice for you and your goals. 2. Specializes in the type of home, area and/or the type of buyer that corresponds to your goals. It’s better to narrow down your search to real estate agents whose expertise matches your criteria. If you’re a first-time buyer, then those agents who deal with first-timers all the time know how to provide more guidance (lots more hand-holding!) and keep up-to-date on assistance programs just for that market. If you’re a condo buyer, then an agent specializing in condos knows the intricacies of dealing with this type of purchase and condo associations.  Whatever it is you are looking to buy, just make sure your agent is experienced in that particular segment of the market. 3. Makes you comfortable. Your gut will tell you if this is someone you can work with for a period of time, and if you will feel at ease when asking any questions or expressing your concerns. You’re going to have a working relationship with this person and it will be stressful and exhausting at times. Go with someone who can reduce such tension, has a sense of humor at times, and doesn’t scare you even if buying a home is a scary endeavor for you. Think of your real estate agent as your buying coach (and sometimes therapist and sometimes cheerleader and all the other things you might need along the way!). 4. Takes the time to listen to you in order to help you realize your needs and wants. You should never be forced or feel like you’re forced into anything at any time! A good agent has the skills to help you realize what you need and want by asking you questions and listening to your answers. Questions ranging from, “Do you want to walk or bike to work?” to “Do you want a large yard or green space nearby?” will help you uncover your wants and needs. This process can take time but it’s an important step before you even start visiting homes. An agent who has your best interests at heart will know that you’re not looking for just a house or a condo but a place you will call home.  And most importantly, focuses on finding the right home for YOU and no one else. 5. Respects your time AND your timetable. Your agent knows you’re busy so it’s important they are organized and efficient when it comes to house hunting. They’ll ask you what days and times work best with your schedule. Even more importantly, your agent shouldn’t rush you if you’re not ready to buy (especially if you think you want more time to explore a neighborhood, etc.) or just get cold feet (that’s okay!). But a good agent also knows when you’re ready for that nudge forward if the market dictates quicker decision making. 6. Communicates clearly and regularly. Make sure your agent is easily reached via cell phone, text, or email; and gets back to you in a timely manner. And, on the flip side, that the agent keeps in touch with you on a regular basis with updates on listings and other information on your home search. A good agent will communicate and guide you step-by-step along the way when buying a home, from getting a mortgage to the final closing. Having explanations upfront on what’s expected next will help decrease any anxiety and stress since you’ll be informed and prepared. Find out an agent’s communication style from start to finish in the home buying process. 7. Negotiates well and has your back at all times. Buying a home is a business transaction and your friendly agent also needs to have negotiation skills that will benefit you and your offer. The entire transaction should ultimately be a win-win for both the buyers and sellers (you never want to play dirty!) but a good agent knows when to be assertive in order to get the deal done. Find out more about your agent’s past experiences and tactics at the negotiating table, especially when dealing with multiple offers. 8. Knows the local market inside and out. Go with an agent who really knows the local market in terms of inventory and pricing, the vibe of different neighborhoods, and just stays on top of listings so you can jump in before the crowd. Some agents are more attuned to what’s going on and this can be a big plus when homes are selling fast. Also your agent should have a network of other reliable professionals, such as mortgage lender, home inspector, title company, etc., that you may need along the way. Your agent should be suggesting them to you, and not you to them. 9. Looks at real estate as a financial tool that can empower your life. This will be one of the biggest purchases of your life and you don’t want to have any regrets. Your agent should respect how real estate can change your life for the better and see the possibility it has for your economic stability and security. A good agent knows that buying this home can be a stepping stone for your next home and so on. Your agent should want you to dream big, but still help you find ways to stay on budget. 10. Never says good-bye. Your agent shouldn’t view this one purchase as the end of your relationship but just the beginning — expect them to be there for you over the long-term and ready to work with you when it’s time to sell and move on. They should be someone you trust to turn to with any of your homeownership concerns – a real estate resource for life! Keep coming back here each and every week to learn more about the home buying process and reach out to me anytime with questions about how what you are learning applies to YOUR specific situation.  Just like every real estate agent is unique, so is every buyer and I’d love to help you apply what you are learning in this series to YOUR home buying plans.  Email me and let’s schedule a time to talk.