Chapter 3: Getting Cash For Your House
For most people, buying a house involves a double financial whammy. You have to save up a huge pile of money for a down payment. More than that, you have to convince a bank to give you a mortgage, and this usually amounts to around 80% of the purchase price. It is clear that the first thing you will need to before even looking for property is to get your finances in order.
Let's begin with your credit
Three major credit reporting agencies keep track of credit: Experian, Equifax and TransUnion. These agencies are able to provide information on whether or not you are habitually late in making payments and whether you have had serious problems with credit in the past or bankruptcy in the past 7 years.
If you have a low credit score, it can spoil your chances of getting the best interest rate. It may prevent you from getting financing at all. So get a free credit report and check your score today.
Note: it is quite common to find errors on your credit report. If you do, be sure to correct them right away. At maximum it will take 3 months to resolve. You will probably need to explain any negatives on your report to the loan officer.
Understand your financial boundaries
What can you afford? Web mortgage calculators can give you a good idea of what you can afford to buy. Here's one good calculator to use. Ask a lender to pre-approve you so that you will know what kind of loan and how much you are likely to be given.
The best and easiest way to calculate this is to look for a home that costs approximately two-and-a-half times your current salary. There are other variables that can affect this such as alimony, large debts and other financial obligations. If you have any of these, you may need to start very low.
The amount of your down payment will affect your overall mortgage amount and what you can afford.
Finding money
You will need money for a down payment and for closing costs. As a standard, lenders such as LendingTree like you to have 20% of the home's price in a down payment. The more you can put down, the more willing the bank will be to lend you money. The lower your down payment, the harder you will have to work to find a mortgage.
It is possible to get low down payment loans from private and public organizations like the Fannie Mae Foundation, the Federal Housing Administration, Freddie Mac and the Department of Veteran Affairs. You will need to qualify and then you could pay as low as 3% as a down payment. Their web sites will provide you with more information.
Warning: If you have a down payment that is less than 20%, you will probably have to pay private mortgage insurance. This protects the bank should you fail to pay. PMI adds another 0.5% to the amount of your mortgage for each year. A mortgage of $100,000 will cost around $500 each year.
A piggyback loan can help out also to pay down payments and more and more banks are offering them. These loans cover the down payment and do not require PMI. They are usually home equity loans or a line of credit that runs at 10% to 15% of what the home is being purchase for.
Once you have taken care of getting a down payment, remember to also have enough to cover the cost of closing. Closing costs are made up of legal fees, appraisal fees, inspection fees, loan fees and the fee for a title search. Closing costs can very easily cost between $5000 and $7,000. Generally their price is around 5% of the mortgage.
No cash?
If you find that you do not have the cash to cover all of this, there are some things you can do. Any first time homebuyers are allowed to take up to $10,000 from an IRA (Individual Retirement Account) without any tax penalties. You are also allowed to receive a gift of cash of up to $12,000 (this amount can change each year) from parent without being subject to gift tax.
Taxes on gifts are paid by the giver and not the person that receives the gift. If both sets of parents of a married couple are well off, they could potentially get $96,000/year from them without paying taxes on it.
Lastly, see if your employer can help. Some large companies will help with a down payment or even help you obtain a low-interest loan. You can also use some of your 401(K) as a loan to yourself.
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Chapter 4: Forming The Right Team
