by Dian Hymer
Coming up with enough cash for a down payment and closing costs can be a hurdle for many buyers, particularly first-time home buyers. But, there are ways you can buy a home without much cash on hand.
For example, there is a new first-time home buyer 95 percent loan program. It's called the risk-share or 2 percent down program, and it lets you get into a house with only 2 percent cash down. The additional 3 percent cash can be a personal loan from your credit union or a relative. This 3 percent personal loan must be a fully-amortized fixed-interest rate loan with a five-year due date. An amortized loan is paid off in full during the term of the loan (five years in this case).
Many first-time buyer programs will only give loans to borrowers whose income is below a certain level. That level is often so low that many first-timers with high incomes can't qualify. One benefit of the 2 percent down program is that it's available to borrowers with annual incomes up to $80,000.
A drawback to this, and most low-down first-time buyer mortgage programs, is that the lender requires the borrower to pay Mortgage Insurance (MI). This protects the lender in case the borrower defaults on the loan. The cost of MI varies depending on the MI company and the type of loan, but it can effectively add .5 to 1 percent to the cost of your loan.
Most lenders make MI a requirement when the borrowers are taking out a loan for more than 80 percent of the purchase price. In the past, one way around this, if you had less than 20 percent for a down payment, was to do 80-10-10 financing.
With 80-10-10 financing, the buyer finances the home purchase with an 80 percent first mortgage and a second mortgage (either from the seller or a conventional lender) for 10 percent of the purchase price.
Currently, lenders who sell their loans to Freddie Mac or Fannie Mae, require MI on 80-10-10 financing deals. To avoid MI, the first mortgage can't exceed 75 percent of the purchase price.
Few buyers like the idea of paying MI. Should you postpone home buying until you save enough cash so that you won't have to pay MI? Probably not, unless there are other factors influencing your decision.
First Time Tip: One of the most important factors that should influence whether you buy now or wait to save more cash is what the real estate market is doing. Are home prices in your area rising, falling or are they stable? In markets that are experiencing rapid home price appreciation, you're probably better off buying now than waiting.
Suppose you have $20,000 cash to put down on a home. You can qualify for a 90 percent loan, so your down payment will enable you to buy a $200,000 home. If you buy now and home prices appreciate 7 percent this year, your home will be worth $214,000 next year. Your $20,000 earned a 70 percent return for the year ($14,000 divided by your $20,000 investment).
If you were to wait to accumulate a 20 percent down payment, you would have to save another $22,800 to purchase the same house. Due to appreciation, the same house will cost $14,000 more next year than it does today.
The Closing: When prices are declining, however, you may be better off waiting, particularly if you don't have enough cash to buy a property that truly suits your housing needs.
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