Secrets to stretching your downpayment dollars
With the ever-increasing cost of property everywhere, homebuyers are finding they have to come up with ever-larger payments to buy a home. There are however several little known “tricks of the trade” whereby a buyer can stretch his down payment money. Such tactics are more common in urban areas than in resort areas, but they work just the same.
Recently a young local couple came to me to discuss how to best finance their home purchase in Leadville. They had good jobs, good credit and adequate income, but they were, shall we say, rather tight on downpayment funds and closing costs. Other lenders they talked to had indicated they could get a loan with five percent down, and they would have to pay normal closing costs on top.
They were looking at a home priced at $164,000. Five percent of that price is $8,200.00, and closing costs were about $3,300 and prepaid tax, insurance and escrows would normally run about another $1,000.00. this brought the total they needed to close the purchase to $12,200.00.
The appraisal had already been done and came in slightly higher than the purchase price. In addition, I felt I could qualify the buyers for a 97 percent loan to value mortgage. These were the keys to solving the problem.
We went back to the seller and proposed raising the contract price by $3,000.00 and having the seller pay that amount in closing costs. This is known as a seller concession. It came out as a total wash to the seller, and the seller agreed. We then got the buyers approved for a ninety seven percent loan and based the loan to value on the higher purchase price.
These two tactics resulted in the buyers bringing only three percent of the purchase price, or $5,010 to the table, and about $1,000 to open their tax and insurance escrow accounts and pay interest for the partial month they would own the home the first year. This reduced the cash they needed to close by nearly half.
Needless to say, they seemed relieved at the solution. Nobody really got anything for free, because they did pay a higher price for the house, but they did not have to raise the additional cash.
Another tactic to reduce your closing costs is to agree to pay a higher rate for your mortgage and allow your lender to waive or pay some of his expenses. Generally, for example, a ? percent increase in your rate will allow your lender to waive his origination fee, which is generally one percent of the loan amount.
Thus you are paying a little more each month, but less up front. If you plan to live in a home less than five years, this can be a money saving technique.
Generally seller and/or lender concessions are limited to three percent of the price of the property In addition they property must appraise at the purchase price, so you cannot always adjust the purchase price so the seller concessions come out as a wash to the seller, but it is an interesting bargaining point. Many sellers like to be able to proudly tell friends and neighbors that they sold their property for a good price, and if they forget to mention what they had to do to get that price then let them have their fun.
There are 100% loan to value programs out there, and in some cases even 103 percent. However, these tend to really get expensive in the rate, and may not be a real bargain. There are also some very stringent credit and income requirements on these loans that may be hard for most people to meet.
It is a myth that one has to have twenty- percent downpayment to purchase a home. It is easier and less expensive if you do have twenty percent down, but that is often impossible for a lot of people. You will need fairly decent credit and show income, but often not as much income as you may think.
If you think you can’t buy a home, you may be wrong. Talk with a good lender (or two) and see what they propose. You may be surprised!
Chris Neuswanger may be reached at Macro Financial Group in Avon at 970-748-0342. His e-mail is email@example.com. He welcomes mortgage-related inquiries from readers.
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Lindsey Vonn no longer has a home in Vail, but a big piece of her heart will always remain here.