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

JVM Lending LogoThe 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.

Can China & Saudi Arabia Affect the Real Estate Market?

On January 11, I attended a speech by Carol Rodoni about the Bay Area real estate market with an emphasis on the East Bay. My blogs are going to spread out over a handful of posts to give bite-size tidbits of her speech, which I always find very entertaining:

3dp_china3dp_map_flagCarol started off by saying that 2015 was an extraordinary year in real estate and outlining a few global situations to keep in mind that may have an impact on our 2016 real estate market.

China devaluing their currency:

Carol sees this move as a growing pain and a way to try to support their economy. Every Nov. 11, China celebrates “Singles Day,” the biggest on-line shopping day of the year. Nov. 11, written out as “11/11,” represents four singles, which is also referred to as “Double Eleven.” This past November, Alibaba broke its own record and increased sales by 60 percent, or $14.3 billion. By comparison, American sales on Cyber Monday were $1.35 billion. I don’t think we need to worry about China.

Middle East and the price of oil:

Oil now costs less than $27 per barrel and is still dropping, when only a few years ago it was $109 per barrel. Saudia 4695206-Oil-prices-dropping-vector-illustration-of-fuel-barrels-with-currency-icons-and-a-down-arrow-signify-Stock-VectorArabia has refused to cut down production, perhaps in the hopes of pushing out a few competitors. Saudi Arabia has a tremendous advantage, as their technology to extract oil is inexpensive compared to other countries; this includes the U.S., where fracking has become a provider of jobs in the Midwest. Saudi Arabia may be okay with lowering prices to eliminate smaller competition, like Iran, now that oil sanctions have been lifted.

As a result of how chaotic the world is, Carol doesn’t believe the Fed will raise rates more than twice in the next year. She said she believes the next rate hike won’t happen until June, and felt the hike in December was at the wrong time.  All this still makes for a great time to purchase or refinance as rates are still hovering below 4%.

 

The Tax Benefits of Home Ownership

money in pocketMoney Management 101: Buying a home, especially in California, has its benefits from a tax perspective – buyers can deduct their mortgage interest and property taxes from their income after they purchase. For buyers in high tax brackets, these savings can amount to more than $1,000 per month in high-end markets.

Why is this benefit important? For payment-sensitive renters who are considering a first-time purchase and are nervous about their housing payment jumping from $2,500 in rent to $4,000 (for PITI = Principle, Interest, Taxes & Insurance), it may be enough to make them change their mind or scare them into being a renter for life.

What most people don’t realize or most lenders and realtors don’t emphasize (or bother pointing out at all), is that IRSbuyers can recognize their tax benefit right after purchasing by increasing their allowances or exemptions on their IRS W4 form and giving it to their HR contact. By increasing the number of exemptions – because now you own a home and can write off the interest – you don’t need to withhold as much money for the IRS. This allows the new home owner to maximize their take-home pay with each check and mitigate the pain that results from the increased home payment.

Buyers should consult with a CPA or tax planner to figure out their optimal number of exemptions. The idea is that on April 15th, you don’t pay any additional money or you don’t receive a refund from the IRS. If buyers are already claiming a handful of exemptions, then it is unlikely this benefit will give much in the form of extra income flowing into their paychecks.

Some information in this blog taken from JVM Lenders Daily Comments.