Hey there, We keep hearing what an excellent market it is for investing in real estate. I sat down with my lender Kelly Ollendorff to talk about what first-timers need to know in order to purchase a home. Kelly works with a lot of first timers and has great feedback on what you need to do to prepare yourself for the housing market.
Down Payment Assistance Options
- One common misunderstanding seems to be that you need 20% for a down payment. A lot of people have parents that put 20% down on their first home but the market has changed since they were buying homes. Those large down payments just aren’t the norm anymore.
- Down Payments for first time home buyers are now commonly in the 0%-5%range. The terms and rates may not be quite as good as if you had put more down, and depending on what type of loan you get you may need to pay mortgage insurance.
- If you can put down 20% as a down payment it can have some benefits. You may not need to pay for mortgage insurance, and you may get better interest rates.
- When thinking about your down payment it is helpful to keep in mind that for every $1000 that you put down you will be reducing your monthly mortgage payment by ~$7.
- It can also increase your buying power. If you can afford a house you like within the 0-5% down payment range it may be worth doing, especially in Austin’s tight market where inventory moves fast.
- There are options for what types of investments you can use for your down payment. Personal savings, gifts from family and relatives, borrowing against a 401k or withdrawing from it (though that has its own tax repercussions) and of course using your tax return may all be viable options.
- One program Kelly has been recommending for down payment assistance is the Hill Country down payment assistance program – for all of Travis County including the city of Austin – no first time home buyer component required. You have to be within 80% of the median national income (a family of four could earn up to $105,000 and be eligible for this grant to assist with down payment, much higher than the $40,000 cap that is allowed by the city of Austin down payment assistance program.) The Hill Country down payment assistance program also allows you to sell the home without paying back the down payment assistance later.
Debt To Income Ratio – A Major Pitfall for Millennials
- Debt to income ratio is a calculation used to determine your actual buying power from your income and your debts. Because banks want to prevent loaning money to people that are overextended or might have difficulty making payments, they compare the money that you have coming into the money you have to pay out based on your debts.
- Your debt to income ratio will figure at the price of a new mortgage payment along with your existing student loans, car payment, and other obligations. So in situations where you have a large amount of your monthly income already committed to expenses you can find it hard to get any type of loan.
- Lack of Credit or no credit can be a potential issue for first timers. Especially people at the start of their career who have lower salaries may find that their student loans tie up a lot of their ability to buy right off the bat.
- So if buying power is restricted and you still want to get into a house it may mean prioritizing the new home over a new car or furniture for the new home.
- Payday loans are also very problematic because their payments count against you even if you pay them on time. A credit card is a much better option for making it to the end of the month because paying off your balance positively affects your credit rating. Missing payments is still a bad idea, though.
- If you are in the process of buying don’t make any major purchases or open any lines of credit. I realize I already said this, but it came up several times in my conversation with Kelly.
- Make sure that you haven’t co-signed for any purchases for your friends or family. It can affect your on paper debt to income ratio and potentially hamstring your buying power.
- Takeaway – In the run up to buying a house manage your credit carefully. Don’t be afraid to use credit that try not to increase the overall amount of debt that you have. If you want to buy a big home that might preclude buying a new car or new furniture, and it’ll certainly be something that is easier if you pay as much of your college debt as you can.