Mortgage

What's the most cost effective approach to purchase a house? 7 methods

Find your cheapest way to buy a home

Cheap houses are in short supply these days. However, this does not mean that first-time buyers will be excluded from the property market.

Many buyers can easily afford monthly mortgage payments. Your only challenge is finding cash for a down payment and closing costs.

Fortunately, there are many ways you can cut your down payment and closing costs so you can get into a home without the previous barrier.

You can combine these strategies to find the cheapest way to buy a home for you. If you're lucky or smart, you may be able to move in without paying much out of pocket.

Review your home purchase eligibility (March 15, 2021).

In this article (jump to …)

Use a no down payment mortgageUse a low down payment mortgageGet yourself a gift, scholarship, or loanLet the seller or lender pay the closing costsConsider a fixer upper Foreclosures and Short Sale HousesImprove Your Finances Before You Buy

1. Use a no down payment mortgage

A no down payment mortgage may sound too good to be true. But that is exactly what two types of loan offer.

If you qualify for either qualification, you are far from moving into your own home with little or no upfront cost.

VA loan

You can only get a VA loan if you are an active duty member, veteran, or part of an affiliated group, e.g. B. surviving spouses. These mortgage loans are supported by the Department of Veterans Affairs and are designed to make home ownership more affordable for those with a service history.

If you qualify, it is very likely part of your cheapest way to buy a home. The benefits of a VA mortgage include:

No Down Payment RequiredLimited Closing CostsNo Continuing Mortgage Insurance Typically the lowest mortgage rates around Flexible loan requirements

A pre-financing fee is required for VA loans. However, this can be included in the loan amount so you don't have to pay it in cash.

Other closing costs for VA loans must be paid upon completion. But read on for programs that can help you cut your expenses. Some borrowers with VA loans actually move in without paying a dime up front.

Check Your VA Loan Eligibility (March 15, 2021)

USDA loan

USDA loans are another zero-down option offered by the U.S. Department of Agriculture. As the name suggests, to get a USDA loan, you must buy in a designated "rural area" – but that includes 97% of the US landmass.

You must also have a household income that is low to average for the area you are buying in. There are other rules, but if you overcome both of these hurdles, there is a good chance you will qualify.

Like VA loans, USDA mortgages offer:

No Down Payment Often Below Market Mortgage Rates Reduced Mortgage Insurance Costs

Those who qualify may be able to get help with closing costs from down payment support programs (see below).

USDA loans require ongoing mortgage insurance but are cheaper than other low down payment loan types.

This is an excellent, inexpensive way to get your foot in the door as a homeowner.

Check Your USDA Loan Eligibility (March 15, 2021)

2. Use a low down payment mortgage

If you are not eligible for VA or USDA loans, don't worry. Because there's a good chance you can get into a new home with just a 3% or 3.5% deposit.

Home buyers with less than perfect credit should consider an FHA loan. If your score is 580 or better, you can qualify with a down payment of just 3.5% of the purchase price.

And the news is even better if your FICO score is a little higher.

Many with scores as low as 620 will qualify for a Fannie Mae or Freddie Mac compliant loan. And these offer down payments of just 3%.

None of these loan programs require a "minimum borrower contribution". This means that no money has to come out of your own pocket for the down payment or the closing costs.

You can cover all of your upfront fees with grants, gifted funds, or down payment loans when you are eligible for assistance.

Check Your 3 Down Mortgage Eligibility (March 15, 2021)

3. Get a gift, grant, or loan to cover your up-front costs

We mentioned earlier that first-time buyers can often get help with down payment and closing costs. This is how it works

Grants and Loans for Home Buying

Down payment assistance programs (DPAs) should be better known than they are. There are thousands across the country with at least one (usually several) covering every state or county.

Each DPA program is independent and has its own rules and offerings. So we cannot say that if you meet the "y requirements" you will get an "x amount". However, eligible buyers often receive thousands of dollars for their down payment and / or closing costs.

You should learn about all of the DPA programs in your area and apply for those that you think may be helpful. Search for programs online or ask your loan officer, broker, or real estate agent for suggestions.

If you are lucky enough, you may receive a direct grant (gift) that will cover some or all of your down payment and closing costs.

Or you can get a loan that only has to be paid back when you move – and even then it can be granted if you stay home for a certain number of years.

Worst-case scenario, assuming you're approved, is getting a low-interest loan that you pay back along with your mortgage. But that's a pretty good "worst" case.

Family gifts

Many parents and grandparents love to help younger family members buy homes with a cash gift for their down payment. Lenders acknowledge that. And almost everyone agrees.

However, there are rules that apply in these circumstances:

It has to be a real, direct gift, not a loan disguised as a gift. The giver must provide a formal gift letter confirming the agreement. There must be a clear paper trail showing how much money is being transferred from the giver to the recipient's account

Of course, it doesn't have to be a parent or grandparent. Every member of your family will. And nothing prevents a friend from giving the gift. But the further the relationship is, the harder it is for you to convince the lender that everything is legitimate.

4. Let the seller or lender pay your closing costs

Closing costs can be expensive – often 2% to 5% of your mortgage amount. This can come as a surprise to first-time buyers who have just saved and budgeted a down payment.

If you're struggling to find cash for closing costs, there are several creative ways you can cover them.

Seller concessions

One possibility is to negotiate “seller concessions”. Under such an agreement, the seller pays some or most of the buyer's closing costs. You may pay a slightly higher purchase price in return (which would be covered by your mortgage loan).

Seller concessions are common in some areas. But don't be too excited. Sellers are under no obligation to help you. And they probably only do that if it is in their best interest.

These agreements are most common when a seller is eager to sell and you are the only potential buyer on the horizon. Or if your offer is so much higher than anyone else's that it makes sense to get a deal.

Note a few points. First, the seller pays nothing and instead gets less on the deal. Second, there is an absolute rule that this “kickback” is strictly limited to the actual closing costs (you cannot get cashback).

There are also limits on concessions – usually around 3% for low down payment loans.

Lender loans

With lender loans, the mortgage company pays some, most, or all of your closing costs. Some just pay their own fees. Some pay fees from third parties, such as B. the evaluation fee. And some will cover the lot, including property taxes and homeowner insurance, which are due upon completion.

Of course, lenders are not in the business of free lunches.

In return for lender credit, you usually pay a higher mortgage rate. And you can be pretty sure that in the long run you will pay more than the cost you save.

However, if money is tight on closing, you may think this is worth the price to become a homeowner. You may have the option to refinance at a lower interest rate later.

Review your mortgage options with no closing costs (March 15, 2021).

5. Consider a fixer upper

If you watch a lot of HGTV you might think that it is easy to buy a Fixer upper cheaply and fix it up. But even professionals sometimes have problems. And DIY projects can play snowball for amateurs.

In general, a fixer upper is a structurally sound home in need of mostly cosmetic improvement. As a first-time buyer, unless you are a professional contractor, you will likely need to hire someone to do renovations. And that can be expensive.

However, if you're lucky with your home and are ready to get some work done, you can make real savings with Fixer tops.

Dave Ramsey’s website can save an average of $ 60,000 on sales price – and more on smaller down payments and mortgages.

If you want to go that route, affordable financing options are available.

A good choice is the FHA 203k mortgage, which covers your home purchase and repairs with a single loan. Even better, it has mild credit and down payment requirements, just like the standard FHA mortgage.

Check Your FHA 203k Eligibility (March 15, 2021)

6. Buying a foreclosure or short sale home

There aren't nearly as many cheap, well-qualified foreclosure or short sale houses in the market as they used to be. But there are still great deals out there if you are looking for them.

The foreclosure or short sale process is a little more complicated than the standard home buying process. You should therefore inform yourself about the details before starting.

Short sale

In a short sale, you are still buying from the owner. The bank or mortgage lender has indicated that they will allow a sale for less than the current mortgage balance. But it rarely sets a dollar amount. So you make the owner an offer and the bank considers whether they will allow the sale.

And then it thinks about something. And often more. Stories of banks taking six months to respond to short sale offers are commonplace. And there is always the risk that the purchase will fail.

But if time is your friend and patience is your greatest virtue, you could get a real bargain by selling them short.

isolation

If the home cannot be sold through a short sale, or if the bank skips this step, the property will be foreclosed. The lender confiscates the property, evicts the residents and usually offers the house up for auction.

Most foreclosures require a cash payment. You cannot participate without these funds. Some allow mortgages. However, this involves a lot of groundwork and the risk of being outbid.

If a house cannot be auctioned, it becomes "real estate" (by the bank). These REOs can be a source of great bargains.

Note, however, that there may be reasons why a home couldn't be auctioned off. Hence, caution is also important, and a professional home inspection is vital.

7. Improve your finances before buying

If you are really looking for the cheapest way to buy a home, make sure your finances are in good shape before applying for your mortgage.

But don't let “perfect” be the enemy of “good”. If you wait until everything is the best you can, you risk missing out on the benefits of home ownership over the years while you make improvements.

So in the year or months leading up to your mortgage application, do your best to:

Increase Your Credit Score – Even a small improvement can result in a worthwhile reduction in your mortgage rateReduce your existing debt – Credit card and loan repayment will have a positive impact on your debt-to-income ratio (DTI), a key measure of eligibility for a mortgage. Insist on opening new credit accounts or closing existing accounts (not intuitive). This can negatively affect your score. Increase Your Savings – A deposit that is just a little more than the minimum may result in a lower rate. And lenders like to see those extra "cash reserves" as they make you a more reliable homeowner

Nobody expects miracles. But every little thing you do now could pay off when you receive your mortgage offers.

And of course you want several of these quotes. Because comparison shopping between multiple lenders is one of the best ways to find your cheapest mortgage. You save money in advance and over the term of the loan.

The cheapest way to buy a home: In short

So here we are. These seven strategies are designed to help you become a homeowner sooner and at a lower cost.

You can reduce everything to the following:

Choosing the Right Mortgage for your needs
Get all the help you can with the down payment and closing costs
Considering All Types of Real Estate – However, be careful with fixer tops, short sales, and foreclosures unless you are a professional
Work on your finances before applying for your mortgage – the sooner you start, the easier it will be
Obtained pre-approval for a mortgage before you house hunting. This shows you your "real" price range
Shopping for your best lender

If you do, you should be set for success. Rather than scouring the real estate market for “cheap homes”, your first home could be your dream home.

Check your new plan (March 15, 2021)

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