Down Payment Assistance and Affordable Home Loan Options in Today’s Housing Market

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In today’s hyper-competitive housing market, home affordability is more important than ever. Rising prices and fluctuating interest rates can make purchasing a home feel out of reach for many potential buyers. Fortunately, there are numerous loan options and down payment assistance programs designed to help first-time buyers, lower-income borrowers, and others get into their dream home without waiting for years to save up a large down payment or for the market to shift.

If you’re navigating the home-buying process, especially as a first-time homebuyer (typically defined as someone who hasn’t owned a home in the last three years), knowing your options could save you thousands of dollars. A local independent mortgage broker can guide you through these options, helping you make informed decisions that align with your financial situation.

Saving on the Down Payment

One of the biggest misconceptions in home buying is the idea that you need to put down 20% of the home’s purchase price at closing. This is far from the truth for most buyers, as there are various loan options available today to help reduce the burden of a large down payment.

0% Down Payment Programs

Some lenders now offer 0% down payment programs, meaning you can purchase a home without having to make a down payment at all. These programs are often structured as second loans or mortgages, with some offering interest-free payments or no monthly payment requirements throughout the loan’s term. However, these programs are typically available to buyers who meet specific criteria, such as having an income below a certain threshold. To see if you qualify, work with a local mortgage broker to understand the loan eligibility requirements and details.

Government-Backed Loans

Government-backed loans can offer additional pathways for homebuyers to secure low down payments. Some options include:

  • FHA Loans: These loans allow you to bring as little as 3.5% down, making homeownership accessible to buyers with lower credit scores or limited savings.
  • VA Loans: If you or your spouse are a military veteran, you could qualify for a VA loan, which allows you to purchase a home with 0% down and no private mortgage insurance (PMI).
  • USDA Loans: If you’re purchasing in a designated rural area, a USDA loan might allow you to put down as little as 0%. These loans are geared toward low- to moderate-income buyers in qualifying rural regions.

Saving on the Interest Rate

Locking in a lower interest rate can save you thousands of dollars over the life of your loan. One of the most popular strategies for doing this is through a rate buydown, where you pay an upfront fee to secure a lower interest rate for a set number of years. This strategy is particularly helpful if you expect your income to grow over time or if you want to manage your expenses during the initial years of homeownership. Rate buydowns can reduce your rate by as much as 3%, and some sellers may even contribute toward the buydown as part of the closing negotiation.

Another option to consider is an adjustable-rate mortgage (ARM). ARMs often offer a lower initial rate that can adjust based on market conditions after a set period. This could be a smart choice if you anticipate rates dropping in the future or if you don’t plan on staying in the home long-term.

Other Cost-Saving Opportunities

There are additional ways to lower your overall costs when purchasing a home. Some options include:

  • Escrow Waiver: Instead of wrapping property taxes and insurance into your mortgage payment, you can pay them directly, leading to a lower monthly payment.
  • Appraisal Waiver: Depending on the lender and property, you may be able to skip the appraisal process entirely, saving you hundreds of dollars in fees and speeding up the loan approval process.
  • Financing Closing Costs: Some lenders allow you to roll closing costs into the loan itself, spreading out the expense rather than paying upfront at closing.

Is Affording Homeownership Too Good to Be True?

With so many loan products and down payment assistance options available, some buyers may wonder if it’s too good to be true. The good news is that today’s mortgage industry is highly regulated to protect borrowers. Lenders must follow strict guidelines when evaluating potential buyers based on income, credit score, employment history, and other factors. This transparency ensures that buyers who qualify for these programs can confidently move forward, knowing they are being offered fair terms.

How to Access Home Affordability Products

A mortgage broker is your best resource for navigating the home loan process. Brokers have access to a wide range of loan options and can help you find the most competitive rates and terms. They also provide personalized guidance and are available when you need them, even on weekends, making it easier to get pre-approved and submit strong offers in today’s fast-moving market.

By working with a mortgage broker, you can close on your mortgage quickly and efficiently, ensuring that you get into your new home sooner than you might have imagined — and with a financing plan that works for your budget.

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Non-Conventional Financing for New Home Sales Surges in 2023, Rising to 32.4% of the Market

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Nationwide, non-conventional financing options for new home sales saw a significant increase in 2023, according to a National Association of Home Builders (NAHB) analysis of Census Bureau Survey of Construction (SOC) data. These alternative financing methods, which include cash purchases, FHA loans, VA loans, and other unique funding sources, accounted for 32.4% of the market, a notable rise from 28.1% in 2022. This 4.3 percentage point increase signals a growing shift toward non-traditional home financing methods as buyers seek alternatives to conventional loans.

Despite the surge in non-conventional financing, conventional loans remained the dominant method for purchasing new homes, representing 67.6% of the market. However, this figure is lower than the 71.9% share seen in 2022, reflecting a decline in the reliance on traditional financing.

Regional Breakdown: Cash Purchases Lead the Way

Regionally, cash purchases stood out as the most popular non-conventional financing method in several areas. The East South Central region led the nation, with 24.6% of homes started being purchased with cash. Other regions that saw significant cash purchases included:

  • East North Central: 22.0% of homes were bought with cash.
  • New England: 16.9% of homes were cash purchases.
  • Mountain: 12.3% of homes.
  • Middle Atlantic: 12.0% of homes.
  • West North Central: 10.6% of homes.

Interestingly, cash purchases did not dominate non-conventional financing in the South Atlantic, West South Central, and Pacific regions, where other types of financing, like FHA and VA-backed loans, played a larger role.

FHA-Backed Loans Surge in Popularity

Federal Housing Administration (FHA)-backed loans gained notable traction in 2023, especially in the West South Central region, where they accounted for 20.8% of homes started. This is a substantial increase from the 12.9% market share recorded in 2022, highlighting the growing appeal of FHA loans, particularly in this part of the country.

In contrast, the New England division reported the lowest use of FHA-backed loans, with only 1.2% of homes started using this financing method in 2023. This stark regional disparity underscores how local economic conditions and housing markets can impact financing choices.

VA-Backed Loans and Other Financing

Veterans Affairs (VA)-backed loans also played a role in non-conventional financing, particularly in the South Atlantic region, where they accounted for 5.9% of new home sales. However, the use of VA loans was far from uniform across the country. In New England, for example, no homes started in 2023 used VA-backed financing, indicating that this option may be less attractive or accessible in some regions.

Other financing methods, such as loans from the Rural Housing Service, Habitat for Humanity, individual lenders, and state or local government mortgage-backed bonds, were most prevalent in the East North Central region, where they collectively accounted for 5.6% of the market. In contrast, the Middle Atlantic region reported the lowest share of these financing sources, at just 0.9%.

Conclusion: A Growing Trend Toward Non-Conventional Financing

The 2023 rise in non-conventional financing options reflects a shifting housing market, where buyers are increasingly exploring alternatives to traditional home loans. Cash purchases remain a popular option in many regions, while FHA and VA-backed loans continue to offer viable pathways to homeownership for specific groups of buyers.

As economic conditions and housing market dynamics evolve, the trend toward non-conventional financing may continue to grow, offering more flexibility to a diverse range of homebuyers across the country.

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Moving Somewhere New When You Retire? Deciding on a Mortgage is a Big Deal

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Moving to a new location upon retirement is not uncommon, but deciding whether to take out a new mortgage to buy a home is a significant decision. Transitioning from a steady paycheck to a mix of fixed and variable income, along with a new lifestyle, complicates the picture, especially when adding substantial debt.

Mortgage rates currently hover around 7%, and home prices are rising, making this decision even more challenging. “Any time you take on debt, you increase risk in your situation,” says Jim Stork, a certified financial planner based in Illinois.

Who’s Taking on New Mortgages?

Data from the National Association of Realtors reveals that more than a third (35%) of homebuyers last year were between the ages of 59 and 98, with most of them financing their purchases. The decision to take out a new mortgage depends on various factors, including proving creditworthiness and managing the costs of maintaining a home.

Age Isn’t a Factor, But Income Is

While age discrimination in mortgage lending is illegal, lenders focus on your ability to repay your mortgage with non-paycheck income sources. “When you qualify for a mortgage, it’s all based on your income,” says Melissa Cohn, regional vice president at William Raveis Mortgage.

Lenders consider various income sources such as Social Security benefits, pensions, annuities, spousal benefits, disability payments, interest, dividends, and 401(k) or IRA distributions. If a portion of your income is tax-free, lenders may treat it as worth 25% more.

For example, Fannie Mae explains that if 15% of a $1,500 monthly Social Security benefit is tax-free, $225 of it will not be taxed. Adding 25% of that amount ($56) to the qualifying Social Security income results in $1,556 ($1,500 + $56).

Using Your Nest Egg

Different methods can be used to calculate the income your nest egg could provide. One method is asset depletion, dividing eligible assets by your loan term. For instance, a $700,000 IRA divided by 360 months (30-year mortgage) translates to $1,944 per month. “You don’t ever have to take the money out — but you can use your assets [to qualify for a mortgage] as if you were going to take the distribution,” says Cohn.

Alternatively, if you are at least 59-1/2, you can start taking monthly distributions from an IRA or 401(k) without penalty, and the lender will count this as income if you show you have sufficient funds for three years of distributions. This flexibility allows you to adjust distributions after closing, assuming you are not yet required to take minimum distributions by the IRS.

Assessing Debt and Income

Lenders will assess your debt-to-income ratio, which includes your expected mortgage payment and other debts like credit card, student loan, and car loan payments. For conventional loans, your DTI ratio can be up to 50%, and between 43% and 45% for jumbo loans.

Preparing for a Mortgage

Before seeking a mortgage, understand your expected monthly income and expenses in retirement. “Most (new retirees) see a decrease in income,” says certified financial planner Lori Trawinski, director of finance and employment at AARP. While some expenses decrease, others like medical costs, property taxes, home insurance, and utilities may increase.

Consider what will happen to your household income when one spouse dies, as this can significantly impact your comfort level in carrying a mortgage.

Renting First

If moving to a new state or region, consider renting first to gauge the cost of living and fit for your lifestyle. As Jim Stork notes, “Florida in August is not as fun as Florida in January.”

Balancing Debt and Investments

Avoid taking on more debt than necessary, as mortgage costs are fixed, but returns on investments, the housing market, and health needs are variable. Putting down at least 20% to avoid private mortgage insurance and being comfortable with home maintenance costs, which might be 2% of your home’s value annually, are also crucial considerations.

Comparing Interest Rates

Compare your mortgage interest rate to the return on your investments. With current rates around 7%, it’s a harder calculation, especially for conservative investors. If your CDs earn 4% and a mortgage costs 7%, you lose money daily on that decision, explains Stork.

In conclusion, moving somewhere new in retirement and deciding on a mortgage involves careful consideration of income, debt, and overall financial health. It’s essential to weigh all factors and perhaps consult with a financial advisor to make the best decision for your situation.

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Keeping a Low Rate With These Home Equity Loans

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Many current homeowners prioritize holding onto the ultra-low mortgage rates secured during the pandemic. With mortgage rates hovering around 3% at that time, homeowners are now hesitant to take out new loans at today’s rates, which average over 7% for a 30-year fixed mortgage. A 7% mortgage rate would result in significantly higher monthly costs and interest charges over the life of the loan, even if the borrowing amount remains similar.

However, mortgage rates aren’t the only factor that has surged in recent years. Home values have also soared, and the average homeowner with a mortgage now has nearly $300,000 in home equity, with about $206,000 of that being tappable. This equity provides homeowners with an affordable borrowing option for major expenses like home renovations, education costs, business investments, or debt consolidation.

It’s crucial to understand the implications if you want to keep your low mortgage rate while borrowing from your home equity. Some methods, like cash-out refinancing, require giving up that low mortgage rate. However, other options allow you to tap into your home’s equity without altering your existing loan.

Home Equity Borrowing Options to Keep Your Low Mortgage Rate

Homeowners have several ways to borrow against their home equity while retaining the low mortgage rate acquired during the pandemic:

Home Equity Line of Credit (HELOC)

A HELOC is a revolving line of credit secured by your home equity. You can borrow against this line as needed, up to the credit limit, with a typically variable interest rate. The flexibility of a HELOC is a major benefit, as you only pay interest on the amount you borrow rather than the entire credit line. While HELOC rates can fluctuate based on market conditions, they are currently lower than many other borrowing options, such as credit cards. The average HELOC rate is just over 9%, compared to over 21% for credit cards. This makes a HELOC a preferable option for most homeowners, as it allows them to keep their original mortgage rate.

Home Equity Loan

A home equity loan provides a lump-sum amount secured by your home equity, with a fixed interest rate repaid over a set term, usually ranging from five to 30 years. The fixed rates for home equity loans are advantageous as they remain consistent throughout the loan term. Since a home equity loan acts as a second mortgage, it doesn’t replace your current mortgage, allowing you to retain your low mortgage rate. Currently, home equity loan rates average 8.61%, making them more affordable than many other borrowing options.

Home Equity Sharing Agreement

For homeowners hesitant to take on new loans, a home equity sharing agreement is an alternative. This model, offered by specialized providers, involves selling a share of your home’s future appreciation in exchange for a lump-sum cash payment. While fees can be steep, this option helps avoid additional debt and doesn’t require changing your current mortgage rate. It can be worth considering under the right circumstances, but thorough research is necessary to understand the terms fully.

By exploring these home equity borrowing options, you can leverage the equity in your home while keeping your low mortgage rate secured during the pandemic. This can be particularly beneficial in today’s high-rate environment, where current mortgage rates are more than double those of pandemic-era rates. Before making any decisions, it’s essential to carefully consider the costs, risks, and long-term implications of each option to determine the best fit for your financial situation.

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Mortgage Rates Decline Amid Strong Employment and Inflation Data

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Mortgage rates have dropped for the second consecutive week, with the average 30-year fixed-rate mortgage falling nearly a quarter of a percentage point over the past two weeks. The 30-year fixed-rate mortgage averaged 6.74% for the week ending March 14, down from 6.88% the previous week, according to Freddie Mac. This marks a slight decrease from last year’s average of 6.60%.

However, homebuyers should not anticipate a significant drop in rates in the coming months. Despite the recent decline, mortgage rates are expected to remain high due to persistent inflation pressures. “Despite the recent dip, mortgage rates remain high as the market contends with the pressure of sticky inflation,” said Sam Khater, Freddie Mac’s chief economist.

Rates Remain High Amid Inflation Concerns

Over the last four months, mortgage rates have decreased from the peak of 7.79% observed last year. This has somewhat improved affordability for homebuyers who have been navigating one of the least affordable housing markets in decades. Nonetheless, robust inflation readings and unexpectedly strong job numbers in February indicate that the economy is hotter than analysts and economists would prefer.

Homebuyers continue to be highly sensitive to interest rate changes. The slight drop in rates last week led to a 7% increase in mortgage applications for the week ending March 8, as reported by the Mortgage Bankers Association.

The Federal Reserve’s Influence on Mortgage Rates

The Federal Reserve’s aggressive campaign to hike interest rates has significantly curbed inflation over the past two years. However, Fed Chair Jerome Powell has emphasized the need for more consistent evidence of improving inflation before considering rate cuts. Market expectations suggest that Fed rate cuts may not occur before summer, and possibly not until fall. This delay in rate cuts contributes to keeping mortgage rates elevated.

While the Federal Reserve does not directly set mortgage rates, its actions influence them. Mortgage rates tend to follow the yield on 10-year US Treasuries, which are impacted by expectations regarding Fed actions, actual Fed decisions, and investor reactions. Lisa Sturtevant, chief economist at Bright Multiple Listing Service, noted, “In the short-term, mortgage rates are probably not going to fall much further this month.”

Market Dynamics and Affordability Challenges

Some homebuyers are relieved to see rates lower than those from last fall when they approached 8%. “Any downward trend in rates later this spring will bring more buyers — and sellers — into the market,” Sturtevant said. Currently, mortgage rates are approximately one percentage point lower than their peak last year.

For instance, in October, with a median home price of $391,800 and an average mortgage rate of 7.79%, the typical monthly payment with a 20% down payment was $2,254. This week, a home priced similarly with a mortgage rate of 6.74% would result in a monthly payment of $2,031, saving the buyer around $220 per month. However, rising home prices might offset some of these savings.

Although more inventory is becoming available, typical for the peak spring homebuying season, affordability challenges persist. Some buyers might delay purchasing in hopes that mortgage rates will drop further. However, this strategy has its risks. Falling mortgage rates are not guaranteed, and home prices are expected to increase. “Spring buyers may see higher mortgage rates, but summer buyers are likely to see higher home prices,” said Jones.

In conclusion, while the recent drop in mortgage rates offers a slight reprieve for homebuyers, the overall economic environment and housing market dynamics suggest that rates will likely remain elevated, and prospective buyers should weigh their options carefully.

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