October 8th, 2019 11:18 AM by Jackie A. Graves, President
has its perks, among them tax advantages (the mortgage
interest deduction and capital gains exclusion), as well as
equity-building opportunities. With the homeownership rate at 64 percent,
clearly Americans value having a stake in where they live.
prices are going up each year, often outpacing wage gains, making it
increasingly difficult for people to accumulate a down payment for a home. That
keeps them renters rather than homeowners.
cycle has been a very difficult thing to break out of in the last 10 years
because of the appreciating home market,” says Joseph Polakovic, president at
Castle West Financial in San Diego. “As renters save their money for a down
payment, the price of the home they were saving for is simultaneously going up
in value and requiring more money for a down payment and banking reserves
(usually six to 12 months of mortgage payments).”
So how do renters, who are facing rising home prices and high
student loan debt as well as other living expenses, make the leap to owning?
The answer is as varied as the circumstances of each would-be homebuyer. For
many people, the down payment is the main barrier to homeownership, while
others struggle with credit issues and some face a lack of affordable housing
in their area.
Here’s some expert advice on what hopeful homebuyers can do to
escape the rent cycle.
Speak with a pro
If you’re a first-timer, navigating the home buying process can
be intimidating. Buying a home is a huge undertaking that comes with big price
tags and often long-term ramifications.
If you’ve never bought a house, then you don’t know what you
don’t know. It’s a good idea to begin your journey with an expert who can work
with you to put a plan in place that aligns with your finances and goals.
“An accountant, mortgage broker or other financial professional
can help with budgeting potential costs and what you can realistically expect
from your income and available funds,” says Leslie Tayne, founder and attorney
at New York-based Tayne Law Group. “You’d be surprised how people make mistakes
that can negatively impact the buying process, such as taking money from family
without written designations or buying more things on credit or even deferring
Whip your credit into shape
Like your SAT score or batting average, your credit score is a
number you’re either proud of something you won’t be bragging about at
Thanksgiving dinner. If it’s the latter, you might be stressing way too much.
Unlike natural intelligence or raw hitting talent, you have total
control over your credit score (absent any fraud or identity theft). And this
is an important piece of the homebuying puzzle because it’s the key to getting
the best interest rate.
“I help a
lot of homeowners get out of this very cycle. My first piece of advice to
potential first-time homeowners is to work on their credit,” says Donovan
Reynolds, a real estate agent at Coldwell Banker Residential Brokerage in
Atlanta. “They need to have at least a 580 credit score; so paying down credit
card debt and keeping a low debt-to-income ratio is crucial.”
Start saving now
a few good reasons for having a sizable house down payment. The big one is to avoid
private mortgage insurance, or PMI. This is a fee lenders tack on loans for
buyers who put less than 20 percent down, and it can add hundreds to your
monthly mortgage payment. You can learn more about it here.
down payment also means a lower loan-to-value ratio, or LTV, which helps offset
a lender’s risk, so they are willing to offer you a better interest rate to
attract your business. It also shrinks your principal balance faster, which
affects how much you pay in interest and how much equity you have in your
advice for future homebuyers is to start saving as early as possible. If you
consistently set aside a part of your paycheck, you can build a down payment
that will be there when you are ready to buy a home,” says Judith Corprew,
executive vice president, chief compliance & risk officer at Patriot Bank,
important to cut back on your expenses, Tayne adds. She recommends downsizing
wherever possible, including switching to a smaller cable package or cell phone
plan, and squirreling that money away in a down payment savings account.
up some funds can allow you to save more for a down payment. This can also
include taking on an extra job to increase cash in the bank, so you qualify for
loans more easily and with lower costs,” Tayne says.
Low- or no-down payment home loans
happens if you can’t save up (much) for a down payment, but you’d rather
convert your monthly rent check to a monthly mortgage check? The answer: low or
no down-payment home loans. This is not a
silver-bullet solution as you’ll likely pay PMI and incur a higher interest rate, but
it can help get you in a house faster.
several private and government-backed lenders that offer loans to people who
don’t have a big down-payment. Big banks, like Bank of America and Wells Fargo,
offer 3 percent down payment mortgages.
there are several government programs that offer less stringent credit
requirements and lower down-payment loans than traditional lenders.
people buy homes in rural and some suburban areas with zero down using U.S.
Department of Agriculture home loans. There are some income limits, but they
can be surprisingly generous,” says Adam Spigelman, vice president at Planet
Mortgages with no down
payment or a small one:
Department of Veterans Affairs
Navy Federal Credit Union
Federal Housing Administration
Rent out a portion of your house for income
a landlord might be the perfect second job to help you afford a home. That is, buy a duplex or a house with an extra
room and rent it out to help pay your mortgage.
This is a tactic some buyers use to offset housing costs.
cash flow standpoint, if you’re paying $1,200 a month for a tiny apartment,
often you can buy a small home or duplex and have a similar payment. Even if
your payment to own is as high as $1,600 the strategy still works great,” says
David Young, CEO at Paragon Wealth Management. “Charge your renter around $1,000
a month and now your cost to own is only $200 to $600. Worst case, you have cut
your rent cost in half.”
Consider a 401(k) loan
Tapping your 401(k) is usually not
recommended outside of emergencies, but some experts think it can be a useful
tool in some circumstances.
loan is different from getting an early withdrawal, in that you won’t pay a
penalty. Instead 401(k) borrowers will pay interest — which can be on par with
personal loans. The good news is that the interest goes back into your account,
so essentially you’re paying yourself to borrow your money.
dicey if you leave or get terminated from your job before you repay the loan.
Under the Tax Cuts and Jobs Act of 2017, you must repay the loan by the due
date of your tax return for the year when you leave your job or you’ll have to
pay taxes and a penalty (if you’re younger than age 59.5) on the outstanding
with a lot of federal employees who contribute to the Thrift Savings Plan
(TSP). One of the best features of the TSP is the TSP loan where you can take
as much as $50,000 and pay the interest rate of short-term U.S. Treasurys,
which is currently around 2 percent. Better still, that interest that you pay
gets credited to your account. It’s a wonderful tool,” Polakovic says.
Use a monetary gift
the popular honeymoon registry where people can donate cash for a post-nuptial
vacation, also offers a mortgage registry called Homebuilder. This tool is one
way to crowdsource a down payment. More traditional cash infusions include good ol’ monetary
gifts from family members.
parents or family members are giving their grown children an inheritance now so
they can see them enjoy it,” says Martin Eiden, real estate broker at Compass
in Manhattan. “Lenders are amenable to this as long as the person gifting will
state in writing that it is not a loan and does not need to be paid back.”
Buy a house with a friend
some friends you wouldn’t share a Netflix account with much less a mortgage.
But, there are those rare people who have proven their trustworthiness over the
years and can be responsible enough to get into a long-term loan with. Friends
who fall in the latter category might be good candidates with whom you can co-buy a house.
home with a friend is not just an option for married couples, but it does
require a lot of trust as you both are intertwining your financial futures
together,” Polakovic says. “I recommend having a strong side agreement with the
other person that clearly lays out the exit strategy.”
you go this route, it’s a good idea to sit down with a real estate attorney to
understand the laws and your rights as a co-signer on the mortgage. Questions you
should ask are: What happens if one of you wants to sell and the other doesn’t?
What if one of you wants to invite a partner to move in — how would mortgage
payments and rent be split up? What if one person loses their job and can no
longer afford the mortgage?
Research first-time homebuyer programs
many homebuying programs for people who have never owned a home or haven’t
owned one in at least three years. Across the U.S.,
there are more than 2,500 grants and loan programs to make homeownership more
accessible, according to a report by
the Urban Institute.
payment assistance programs may be a soft second mortgage, where the
organization can provide a certain amount to assist you that can be used
towards the down payment or closing costs. These programs may have income
requirements or require you to be a first-time homebuyer,” Tayne says.
contacting a local lender, they likely have program information to point you in
the right direction.
Consider less-expensive housing
“starter house” might summon images of run-down fixer uppers or homes in
neighborhoods far from where you work or your kids go to school, but they might
be your springboard to homeownership.
homes can be effective ways to build equity which you can later use for a down
payment on a bigger, better home— closer to prime neighborhoods.
for starter homes might include condos, duplexes or manufactured housing (as
long as you own the land). In fact, a recent report by
Urban Institute showed that manufactured homes appreciate at nearly
the same rate as stick-built homes, making them viable candidates for buyers on
housing can be less expensive than a traditional new home. You can buy certain
manufactured homes with just 3 percent down, using a Fannie Mae MH Advantage
home loan. These aren’t your grandparents’ mobile homes, they have features
like pitched roofs, garages, and drywall throughout,” Spigelman says.
can see, there’s no one path to homeownership. And not all options will work
for everyone. Keep in mind that everyone is dealing with different financial
and personal circumstances, so be sure to speak with an adviser about what’s
best for you.
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