3 reasons to make smaller down payments

My friend Jay Vorhees at JVM Lending put together some thoughts on why you should make smaller down payments. I thought this was an interesting idea, so here is his blog reprinted, with my thoughts at the end! Read on:

We recently had a borrower with ample income and about $70,000 of liquid assets try to squeeze into a $600,000 home with 10% down. She wanted us to put as much down as possible to minimize her housing payment. We instead talked her into putting 3.5% down and using FHA financing for the three reasons discussed below.

Pay off consumer debt: When buyers have a lot of consumer debt, we always encourage them to make smaller down payments and then use the remaining cash to pay off consumer debt. The monthly savings from paying off consumer debt almost always far exceed the potential savings from having a smaller mortgage. In addition, mortgage interest rates tend to be much lower than consumer debt interest rates and most mortgage interest is tax-deductible, while consumer debt is not.
Save cash for the “unexpected”: Many buyers vastly underestimate the amount of cash they will need for unanticipated expenses once they buy a home, especially if they had been renting. These costs include moving costs, new furniture needs, new appliances, minor home improvements of all types (window treatments, floor coverings, etc.), higher utility bills, and higher yard and home maintenance costs.
Take advantage of low rates: When rates are this low, it is much more affordable to put less down and to borrow more in any case.

These are good thoughts by Jay. However, a buyer is at a disadvantage if multiple offers are made. It is more likely, in that scenario, that you will lose out to someone with more money down and they may remove some or all of their contingencies. Each situation is unique and all options should be discussed so a buyer understands the pros and cons and can make an informed decision!

Down Payment Assistance: a video with Robert Ring from Cross Country Mortgage.

Tips for preparing to buy a home

It takes a lot of preparation to buy a home. I know, I know, thank you Captain Obvious, right? But if you’re going to be searching for a home in 2017, I want you to be ready for what is headed your way!

From our friends at Bank of the West, here is a list of great tips for preparing yourself to buy a home. See my summary below:

1. Fix Your Credit

Your credit is one of the first things a lender will look at when approving you for a mortgage loan. You can get a free credit report once every 12 months from each of the three credit bureaus: Equifax, Experian and TransUnion at annualcreditreport.com. Make sure to check for mistakes and file a dispute with the business in question, as well as the credit agency, if you find any inaccuracies. They must investigate within 30-45 days.

2. Maintain Your Credit Score

Your FICO score is the most common number used by mortgage lenders to rate your creditworthiness. You can get your credit report with a FICO score for free, or for a small fee. Anything above a 740 FICO score will help you secure better interest rates. If your score is lower, you may still qualify for a mortgage, just with a higher interest rate attached. Your first instinct may be to find ways to boost that credit score. Here are two things NOT to do:

– Don’t close lines of credit – it may indicate credit risk and actually hurt your score

– Don’t open new lines of credit – the uncertainty of your spending habits with a new card might indicate risk and cause your score to tick up

3. Get a Big Down Payment

You’ll get a better interest rate on a mortgage if you have a larger down payment because lenders will think you’re less likely to default on your loan. Aim for a down payment of at least 20 percent of the selling price. This will also protect you from paying private mortgage insurance (PMI), which protects lenders if you default on a loan.

4. Get Pre-Approved

Meet with a mortgage specialist before you start shopping. They can help you determine an accurate budget and decide what kind of home you can realistically afford. Get a pre-approval letter and add it to a good credit report, income verification and a maximum allowable loan, and home sellers will take you most seriously among the suitors.

5. Keep Track of Your Money

You’ll have lots of documents, bank statements, etc. during the pre-approval and underwriting processes. These will be examined closely to verify income and expenses. If your records show unusual activity, you’ll be asked to explain it and you’ll have to jump that hurdle before continuing the approval process.

If you need a recommendation for outstanding mortgage brokers. I have a few that I highly regard.

Top 5 Must-Do’s for First-Time Home Buyers

So you’ve finally made the big decision. You’re going to buy a house!

You are aware of the long road ahead, but excited to take on the challenge and have a home you can call your own.

It’s a stressful process, however there are a few things you can do to help prepare for your first time through the home-buying process:

Determine your budget.

There are many online calculators available that can help you to get an idea of what your monthly mortgage payments should be, based on how much money you are looking to borrow. Don’t forget to include property taxes, though – estimate 1.25 percent of the purchase price for a yearly property tax estimate. If you are looking at a condo or a townhouse, then you most likely will have to consider a monthly HOA fee. Also, look at what your income, debts and assets are; this is where I strongly recommend you speak with a lender. The good ones break that all out for you and can help you work up a budget.

Examine your credit and credit score.

You want to get yourself in the best position to qualify for the lowest interest rates and best mortgage terms and one way to do that is to beef up your credit score. If your score is less than perfect, look for ways to increase your score. If you have limited credit history, look for ways to build positive credit before you apply for a mortgage loan. This is another area that a good mortgage broker can give some suggestions to improve your credit. No matter what your score is, review your credit report to ensure that there are no errors on your report which ay impact your ability to qualify for the mortgage you want.

Where will your down payment come from? And how much will you need?

Buying a home is a big financial commitment, which can often require a big cash down payment. Where will you be getting your down payment from – savings, a 401(k) or IRA withdrawal? As a gift from family? Although FHA loans are often an attractive option for first-time homebuyers because they only require you put 3.5 percent down, you’ll still need to roughly determine how much 3.5 percent will be and where you’ll be getting those funds from, while still saving enough for closing costs. All the while, you must keep your debt-to-income ratios in line with guidelines.

Begin to gather up all the documents you’ll need to qualify for a mortgage.

When you apply for a mortgage you’re likely going to need to show your lender proof of your identity (passport, driver’s license or similar) as well as recent pay stubs from your employer and copies of your past year (or two years) of tax returns. Each lender will have their own requirements, but gathering together these basic pieces of information can help make the mortgage application process go smoothly. Again, a good lender will send out an introduction email with a list of the things that are required.

Get preapproved for a mortgage before you begin house hunting!

This is a MUST! Home sellers want to know that you’re serious about buying, and one of the best ways to show them that is by submitting an offer that comes with mortgage pre-qualification. In some hot housing markets, sellers won’t even accept offers without a pre-qualification or DU Approval. A good real estate agent will also help guide you through this process, which can include an informative face-to-face about the whole process or a good lender recommendation.

Excerpts of this blog generously borrowed from The Orland Group Realtor Coaching.

How Much Down Payment Does a First-Time Home Buyer Need These Days?

The idea of saving enough money for a 20 percent down payment to buy a home in the Bay Area can be a daunting thought, especially because our average prices are so much higher than the rest of the nation. How can 20 or 30-something’s save that much money and still afford rent and basic living needs?

I posed this question to my favorite lender Jay Voorhees, Co-Owner at JVM Lending.

“Buyers often need less money than they think to buy a home, as long as their loan amount is lower than the conventional and FHA maximum of $625,500. Buyers can either take advantage of FHA financing and buy with as little as 3.5 percent of the purchase price for a down payment, or with conventional financing, purchase with as little as 5 percent down. Both options above, however, require mortgage insurance, or an additional fee that borrowers have to pay every month when their loan-to-value ratio is over 80 percent.”

What does that mean from a real estate perspective? With interest rates and inventory low, it means you will probably be competing for a property. The good news is most buyers will have similar financing; however if one has 20 percent down or all cash, that may be the deciding factor on whom the seller selects.

What can buyers do to avoid mortgage insurance? According to Jay, put down 20 percent, or 10 percent down and get a second mortgage on top of their first mortgage (“80/10/10” financing). This option requires excellent credit and very low “debt ratios.” Jay says that many borrowers are forced to use FHA financing no matter what because FHA is much more flexible with respect to credit and debt ratios.

Jay had a couple final thoughts on the topic:

JVM Lending Co pic — The JVM Lending team in Walnut Creek (photo courtesy JVMLending.com).

“Buyers can also get gifts from relatives to use for down payment funds or closing costs. Buyers cannot use borrowed funds for a down payment. Whoever provides “gift funds” will have to provide a signed “gift letter” attesting to the fact that the funds are in fact a gift.”

And:

“The total closing costs for a purchase can range from $6,000 to $18,000, depending on the type of loan, the loan amount, and the place of purchase (some cities have high “transfer taxes”). If gift funds are not available and buyers are tight on cash, they can, however, ask their lender to increase their interest rate in exchange for a credit to cover some or all of their closing costs.”

If you have specific questions or would like to discuss your options and want to speak with JVM Lending, call them at (925) 855-4491 and ask for Jay, Heejin (both owners), or one of their talented associates. They are in downtown Walnut Creek at 1850 Mt. Diablo Blvd., Suite 530. Give them a call and and tell them you saw this blog on WalnutCreekLifestyle.