I’ve got this listing on Walter Thomas Road on Homer. It’s a really cool house – lots of space, an amazing view of Cook Inlet and the volcanoes, a huge covered deck made for a party and this hot tub that screams blissful relaxation.
The seller on this house is offering to pay up to 3% of the purchase price towards a buyer’s closing costs. An EXCELLENT deal for anyone looking to upgrade with little money to put down.
When I list a house, I try to imagine who would love to live there. This house has a lot of potential. A big family? They’d have lots of space to spread out and enough bathrooms that school mornings would be a breeze! An entrepreneur? The upstairs with its private entrance and its private rooms could easily be an AirBNB or a large VRBO during summer. Weddings on this lawn would be gorgeous.
Whoever buys this house, I imagine a downpayment and closing costs to be a factor in their decision to buy. So I called up Rhonda Johnson from Cornerstone Home Lending in Homer and asked how you could buy this home with little or nothing down and whether or not its a good idea.
Turns out you can and it is! There are a couple different zero down options and a few more for low downpayment options.
USDA
This loan is income-sensitive, but for example on the Kenai Peninsula, if a family of 4 makes less than $103,700 per year, they are eligible for a zero down. A family of 5 or more could make up to $136,850 and still qualify. What’s interesting about this loan is that each area of the state has different limits, so make sure to check with your lender.
VA
The VA offers a zero down option for service members, either active military or retired. Even Reserves are eligible after a certain period of time serving in the reserves.
HUD 184
The HUD 184 is a program with 2.25% down for any Alaska Native or American Indian. You just need to be a member of a tribe, or a shareholder in an Alaska Native Corporation to be eligible to apply.
There are some conventional loans that require 3% down but these are income-dependent and you’d have to meet income limits.
FHA is the next lowest down payment option with 3.5% down. There are no income requirements for an FHA loan. They are for any qualified borrower, not just people who cannot afford a conventional home loan. What’s compelling is that FHA is more lenient on credit score and requires less reserves to be held.
If you find yourself working hard to save a down payment, how much to save is an interesting question.
With all these low down payment options, I asked Rhonda, what are the benefits and drawbacks of having a large downpayment? Simple question, but one worth asking in my opinion.
“Of course the benefits would be that you have the potential for a lower monthly payment, and possibly, no mortgage insurance.,” explains Rhonda. “However you also have that much less liquid cash reserves.”
She then went on to explain that with rates the way they are today, for every $1,000 in down payment that you put down, you typically save less than $5.00 per month on your monthly payment. So unless you have thousands and thousands to put down, you see little effect on the loan.
If you use up most of your liquid cash reserves, you may not be prepared for something that may go wrong or right!
“Have you ever been in one of those situations when you said, ‘gosh, if only I had had the money when THAT deal came along,'” asks Rhonda. “It happens a lot.”
She explains that when liquid money goes into the four walls of a house, it’s not always easy to get back out. You have to go to the bank, pay their many fees, and hope that they say you qualify to have some of your money back out of your home. In Rhonda’s opinion, it is better to be in control of your own money.
The difference in monthly payments for a low downpayment mortgage and a high down payment mortgage isn’t that big. But if having a mortgage and making that payment makes you sweat, you there are ways to reduce pay down your mortgage fast.
According to Rhonda, “if you want to reduce your balance quickly, keep your money liquid and working for you at least earning a little bit of interest. Just pull a few hundred a month out of it to pay extra on your mortgage.”
She sent me this example:
“Lets say that you have a loan for $200,000 at 4% (APR 4.137) for 30 years. Your Principal and Interest payment would be $954.83. But if you wanted to pay that down quickly, for a 20 year loan all you would have to add is $257.13 per month extra to your payment and you would shave 10 years off your loan. For a 15 year loan…just add $525 per month.
The nice thing about this plan is that you are not locked in to that higher payment should you not want to send the extra one month. Like at Christmas when funds might be a little shorter due to extra expenses. Or during a vacation time, or other big event going on in your life.”
Strong point, Rhonda. Strong point.
With so many options for mortgages, a strong lender is very good asset. We’re lucky in Homer to have quite a few of them. My advice when picking a lender is finding someone who really listens to what you’re saying and what your needs are. No two borrowers are alike so make sure that your mortgage officer gets you. Shop around, always shop around to find the lender and the product that’s best for you!