First Time Homebuyers: Where to Go if you Don’t have the Dough
If you believe in the “buy low, sell high” philosophy, now is a great time to buy a home or condo in Phoenix. The credit markets are in disarray, making both buyers and sellers nervous. Meanwhile those days on market are high and climbing higher as buyers are waiting out the current uncertainty. All of that worry makes this fall a good time to explore homeownership, especially if you are a first time homebuyer with nothing to sell before you buy. Condos and townhomes are a popular choice among first time homebuyers because of the lower prices in comparison to single family homes.But the common first time homebuyer lament is often, “how am I coming up with the cash?” And just because the cash is in the bank, that doesn’t necessarily mean you should spend it on your first real estate purchase. Real estate buyers without a cash cushion can too easily get behind on house payments and lose the home they worked so hard to buy.
If you are considering your first home purchase, first make sure you have a few months income in the bank as your buffer against unforeseen circumstances. After making sure the emergency funds are taken care of, its time to consider how to afford the downpayment and closing costs.
Ask your real estate agent for a closing cost estimate, but as a rule of thumb, you can expect to pay about $2000 - $3000 in closing costs for a $200,000 condo. Closing costs can vary depending upon what time of month you close mainly because of prepaid mortgage interest.
In an ideal world, to get the lowest rate without mortgage insurance, you’ll want to contribute 20% of the purchase price in cash, but that’s an unbelievably high amount for most first time homebuyers. If 20% is out of your reach, at least consider saving 5% towards your downpayment to help lower your interest rate and increase your eligibility to get that first loan. Don’t have even the 5% or money for closing costs? Consider these options:
- Tap your IRA for the downpayment. You can take up to $10,000 out of your IRA (with no penalty, though you will have to pay income tax on the withdrawal) to pay a downpayment for your first home. If your spouse qualifies as a first time homebuyer, that amount goes up more. Talk to your accountant for more information and advice as to whether this makes sense for you.
- Look into grant money to help with closing costs. Some Arizona grant money is available to help first time homebuyers with closing costs and to lower the interest rate. Your mortgage broker should be able to determine if this is a good option for you. You’ll still have to arrange for 100% financing or save for a 5% downpayment.
- Get the seller to help pay closing costs. Your offer can have the seller pay for your closing costs and points to help lower the rate. You’ll still have to arrange for 100% financing or save for a 5% downpayment.
- Consider a lease purchase to help you save for the downpayment. In a buyer’s market, sellers are often interested in a creative solution that helps sell their home. If you were to enter into a 12 month lease where $1000 from each month’s payment would be applied to the downpayment at the end of the 12 months, you’ll easily make your 5% downpayment (for a $200,000 home). Make sure you get prequalified with a lender before you enter into a lease purchase.
Determining the best time to enter into homeownership can sometimes overwhelm first time homebuyers. Make sure you rely on your advisers – your real estate agent, your mortgage broker and your accountant - to make the most informed decision you can.