Welcome to our section on dispelling home buying myths of affording a home.
As you probably know, buying a home can seem daunting and knowing what’s fact and what’s fiction makes it even more complicated. That’s why we’re here to talk about some of the myths surrounding buying a home with a mortgage.
This page focuses on myths surrounding affording a home.
Four common myths we’ll tackle are:
- I need to put 20% down to purchase a home
- I have to come up with a down payment and closing costs by myself
- It’s cheaper to rent than to buy
- For fixer-uppers, lenders want all repairs completed before I can close on the loan
Let’s look at myth number one: you need to put 20% down. Many people believe that with Conventional or FHA insured loans, or any home loan, you must have 20% of the cost of the house to put as a down payment.
Let’s take a look at the facts:
It is not true that you need to put 20% down to purchase a home.
The Federal Housing Administration (FHA) has a minimum down payment of 3.5% – not 20%.
Conventional first time home buyers can put a 3% down payment. If you utilize Conventional financing and you are not a first time home buyer then you would need a 5% down payment.
Using 3.5% as the minimum down payment, this means that on a $300,000 home, you would need $10,500.
Given your entire financial picture, either an FHA loan or Conventional loan may make sense.
Compared to conventional loans, FHA has easier financial requirements and easier qualification requirements such as having low down payment requirements with little exceptions. This allows us greater flexibility in qualifying you for higher debt to income ratios using FHA’s underwriting tools that have been granted to us and being more lenient towards past credit issues. An FHA loan will also allow you to use a co-borrower such as a parent to help you qualify for the loan and provides flexibility for the use of gift funds for the down payment and closing costs. While Conventional loans may offer some of these flexibilities, these loans often have restrictions on when they can be used.
The bottom line is, don’t let the lack of a large down payment keep you from acquiring a home.
FHA insured loans require just 3.5% minimum down payment for borrowers with a credit score of 580 and above and a 10% down payment for credit scores between 500 and 579.
Calling and speaking to us about your credit concerns is a wise idea.
We fully understand FHA’s guidelines and can help you determine the best course of action to take.
Myth number two is one we often hear about regarding how to fund down payments and closing costs. The myth is down payments and closing costs must all be my own money.
Let’s look at the facts behind this myth.
This myth is false. Down payments and closing costs do not need to be all of your own money.
AAA Capital Funding provides flexible options for the acceptance of gifts provided they are not received from the seller or another interested party to the transaction. However, closing costs assistance may be provided by the seller.
While conventional loans may offer some of these flexibilities, these loans often have restrictions on when they can be used.
In addition to your own savings, money for down payments can be gifts from these acceptable sources:
- a family member
- your employer or labor union
- close friend
Down payment gifts may not come from these sources
- the seller
- any person who benefits financially from you buying the home (ie. Real Estate Agent)
However, sellers may help with closing costs of up to six percent of the sales price and your Real Estate Agent may also contribute to your closing costs (as long as their help does not go towards your 3.5% down payment).
The thing to remember about this myth is that the money for down payments and the closing costs can be more than the savings you currently have. Consider other sources to help you with your downpayment and closing costs.
Check with us because it’s likely we can help you find assistance for these payments.
Let’s turn our attention to myth number three:
Some people make the mistake of thinking it’s cheaper to rent than to buy without looking at all the facts. Have you ever thought that it turns out renting isn’t necessarily cheaper than buying?
Particularly, when the rental supply is low and demand is high which causes monthly rents to increase. In comparison, when purchasing a home, the mortgage payments are used to pay principal overtime and build equity. Also, as home prices increase over time, owning your home means that any increases allow you to gain more equity. This means that the cost of renting is not as cost effective in the long run.
When thinking about buying, how long you intend to remain in the home will impact the cost effectiveness of purchasing over renting. Generally speaking, the benefits of home ownership outweigh renting if you remain in the home for four or five years.
Homeownership does come with some additional expenses that you don’t otherwise have when renting. In addition to your mortgage payment, you will also be responsible to pay property taxes which are often included in your mortgage payment. Homeowner’s insurance, property maintenance, and if applicable, home ownership HOA or condo dues if the home you purchase requires them.
Let’s look at an example of how renting and buying compare.
Say, for example, you are paying $1,600 per month in rent. This means that each year you are paying $19,200 in rent and you will also have a small amount of renters insurance. With renting, you don’t have any maintenance expenses but the equity or the amount you own is zero. If rent rises over these five years as it does when the housing supply is low, rents can increase.
Compare that to buying a house for $190,000. The total mortgage payment is $1,400 which includes principal, $230 interest, $440 property taxes, $300 homeowners insurance, and $100 per month each year you will likely have some home maintenance expenses estimated at two hundred dollars per month at the end of the first year of buying your home you will have paid two thousand seven hundred and sixty dollars in principle and gained five thousand seven hundred dollars in appreciation assuming a modest house price increase of three percent of course house prices could increase more stay the same or even go down so please know there are no guarantees this equity number may still seem small compared to the amount of your total mortgage payment that’s because in the beginning only a small amount of your mortgage payment goes towards the principal the rest goes to interest over time the amount going to principal increases and the amount going to interest decreases so let’s see how things change after five years
If you were renting over those five years you have paid thousand dollars in rents assuming your rent doesn’t go up plus a total of nine hundred dollars in renters insurance again you don’t have any maintenance expenses but your equity remains zero after five years on the other hand the home mortgage payment would total eighty four thousand dollars over five years including principal interest taxes and insurance and an estimated twelve thousand dollars in maintenance expenses at the outset these expenditures appear higher but you also need to consider that your equity has grown over those five years due to fifteen thousand dollars in principal payments plus an estimated thirty thousand dollars in appreciation again as you continue to stay in your home the amount of equity continues to grow with renting the equity will always remain zero
The decision to rent or buy is a personal one. It depends on your preferences, financial situation, and the housing market and it should not be taken lightly.
It is also important to note that buying and selling of a home comes with transactional costs that will reduce the amount of equity that you can actually realize. These costs, such as taxes and real estate agent commissions can be significant. That is why it usually takes four to five years to build enough equity to cover these costs.
We recommend that you call us here at AAA Capital Funding so that we can help you work up an affordable housing budget and educate you about home ownership.
Many first-time home buyers fall in love with a home that needs some repairs which on the one hand seems like a great investment but on the other hand may not be possible since lenders want all repairs completed before closing.
That’s why we’ll consider myth 4: for fixer-uppers, lenders want all repairs completed before I can close on the loan.
This myth that for fixer-uppers, lenders want all repairs completed before I can close the loan is not true. FHA offers a 203k rehabilitation loan program that can finance the purchase of the home and include the funds to cover major or minor improvements all in one loan.
There are two primary FHA programs dedicated to rehabilitating a home and they are FHA 203k for major repairs and FHA Limited 203k for minor repairs. The qualification requirements for these FHA insured loans makes getting a rehab loan possible versus the complexity of a typical construction loan. Additionally, the rehabilitation costs are incorporated into your mortgage payment
Let’s look at each program.
The FHA 203k allows you to make major renovations to a home by rolling in the cost of repairs into your mortgage. The advantage is the loan amount is not based on the appraised value of the home before the renovation, but instead on the projected value after repairs are completed. It allows you to buy a fixer-upper that may not otherwise have been affordable. The loan must be a minimum of $5,000 and you are required to use a HUD consultant when applying. This program will be used for improvements like making major structural changes such as converting a one-family structure to a two-family structure, repairing a foundation, bathroom and kitchen remodels, adding on a room or finishing a basement, repairing plumbing, heating, or air conditioning systems, installing a deck or patio, and removing an in-ground pool, and many more improvements as well.
The FHA Limited 203k program is nearly the same but it is used for minor, non-structural repairs. It has a limit of $35,000 and you do not need to use a HUD consultant although, you can if you choose to do so. With this type of loan, you can make repairs like repairing plumbing, installing a new refrigerator or other kitchen appliances, installing new windows, repairing decks and patios, eliminating health and safety hazards – the repairs are not limited to this list.
Finding a home with repairs needed can be a great investment. You don’t need to let this myth scare you that you need to make all repairs before closing or stop you from selecting this type of home.