A Closer Look at Financing Your Dream Home!

The American Dream: a two story manor house with white picket fence, two and a half kids, and a Golden Retriever.  It’s picturesque.  For many Millenials, it remains just a picture because student loan debt, tightening credit standards, and home prices vs wage increases have priced them out of the real estate market.  A mortgage is simply out of the question.

types of mortgage terms wordcloud

Types of Mortgage Terms

However, the market is changing.  The National Association of Realtors has multiple guides on how to deal with Millenial buyers.  This is because, for the first time, Millenials are about to be the dominant buyer in the market.  Sadly, this has less to do with improving wages and debt levels than it does a demographic inevitability.  The median age to buy a home is currently sitting at 31 years old; Millenials sit comfortably in there with ages going from 16-35.  We’re just “getting to that age” where one buys a home.  Still though, through multiple surveys coming from Gallup and the Realtors Association, many Millenials still feel underprepared and overwhelmed with the prospect of home ownership.  How do we afford them without a down payment?  How will we get approved with student loans?  Where the heck is Chip and Joanna Gaines to find my dream home!?  All valid questions.

What’s the Deal with Down Payment?

The traditional rule is one should put down 20% when looking to purchase a home.  This rule was an added layer of protection for both the home owner and the bank.  If the market collapsed or the home owner had a financial hardship and could no longer afford the mortgage, it allowed the bank to recoup their cost and avoid having to file a deficiency against the mortgagor; the other side is that it reduced the home buyers monthly bill even further by eliminating the need for mortgage insurance.  Pragmatically, wages just have not kept up with real estate prices.  This has made it difficult or impossible for many would be home buyers to come up with the down payment.

The upside to the doom and gloom is that there are multiple programs out there to help out buyers!  In addition to the conventional and well known VA loans, there are also the FHA and USDA loan programs.

  1. The FHA Loan – The Federal Housing Administration (FHA) Loan has surged into popularity with 3.5% down payment requirements. Plus, the credit score minimums are much lower than conventional loans; a 580 makes you eligible for the 3.5% down, any lower and you’ll be required 10% of the home’s value.  Another bright side is that FHA rules allow third parties to pay your closing costs.  One thing to consider though is that it has two payments for mortgage insurance.  The first comes at closing in the form of an Upfront Mortgage Insurance Premium (UFMIP) and a monthly Mortgage Insurance Premium (MIP).
  2. The USDA Loan — The Department of Agriculture also has a program for buyers. If the property you want is in an eligible area (check out the USDA website to find out which areas are eligible) then you may qualify for a no down payment mortgage.  Plus, the current established interest rate is 3% for low income applicants – this beats most current market rates offered by lenders.  I will say, most of the property eligible is going to be considered “rural” and thus this still tends to be a very under-utilized program.

Keeping Your Budget

I’ve written before that your fixed costs shouldn’t exceed 50% of your net income.  This is going to equate to roughly 3x your gross income.  It’s a give or take though because it also depends on your down payment and interest rate.  There are lots of mortgage calculators out there to help you play around with the numbers.  You also need to take into consideration the additional costs of buying a home.  You can check out this article for a more comprehensive list of some added costs, but basically you have property taxes, home maintenance, and additional insurance.  You need to estimate these costs as well in order to give yourself an accurate and useful budget estimate.  Typically, you will have lower monthly costs when comparing renting vs buying.  This is because when you’re renting you have to pay for your landlord’s mortgage as well as their profit margin in every rent payment.

Be realistic though.  A starter home is so called because it’s the home you start in!  Clever huh?  You’re probably not going to be able to afford a 2500 sq ft home in the affluent neighborhood of your dreams.  It’s just the nature of the beast.  As you get older, your wage will likely go up and, if you’re a savvy consumer, your debt levels will go down.  This will lead to larger down payments and more available cash flow for bigger mortgage payments.

The Takeaway

Don’t buy a home at the expense of your future.  It’s still important to invest while you’re young.  If you’re in a position where you have some available cash for a down payment, and a desire to buy a home, look at all of your options; between multiple loan types with varying terms it’s important to shop your rates and lenders to find what works for you.  The FHA Loan has been an incredibly popular loan recently due to its lower credit and down payment requirements.

 

Readers, what sort of experience do you have buying homes?  Have you ever used an FHA, and if so, what was it like?  Be sure to discuss in the comments below!  Be sure to “like” Cash Flow Celt on Facebook and share with your friends.  Show your friends you’re out there conquering your financial empire!

Cash Flow Celt

I'm just a local business and finance nerd looking to help people get educated about small business, marketing, and personal finance! I write about anything and everything that I can tie into those themes. I'm also Central Florida's only Kilted Realtor, so I write about Real Estate too! Check out my About Me page to see the origins of Cash Flow Celt.

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6 Responses

  1. Catherine J Colangelo says:

    Nice article. I love your writing style. Also I see you are getting some ads – or at least I see ads. FHA and the Inn at Cocoa Beach (which is a fine little hotel!) Congratulations!

    • Cash Flow Celt says:

      Appreciate the kind words on the article. And yes, you do see ads – I was able to get the go ahead from Google to place them. Getting more professional by the day!

  2. Yetisaurus says:

    I think I bought my first home (a small condo) with an FHA loan, and a very tiny 3% down payment. Part of the hurdle was coming up with enough cash to pay the closing costs. If you’re looking to buy your first house, make sure you don’t have any old bounced checks, judgments, or delinquent accounts on your credit report. My credit was squeaky clean (of course), but my then-husband’s credit was marred by an old medical bill he hadn’t paid and–get this–a check that he bounced while paying for Domino’s pizza. Seriously?!?! I didn’t even know they would take a check! We had to clear all of those things up before the bank would let us borrow anything.

    Anyway, buying a starter house is a great idea, because it really can be that first big thing that launches you into the big leagues. Just make sure not to overbuy, because everything about a too-big house costs money. More money to heat it, cool it, repair it, and pay property taxes on it. Buy as small/cheap as you think you can handle for the next 5 years or so, save aggressively, consider paying down the mortgage a little faster, and you should be in great shape.

    • Cash Flow Celt says:

      Overbuying is one of the biggest things I tell people to avoid. It can seem sexy to buy 2500 sq ft when you only need 1500, especially if the face value of the mortgage is right in line. However, as you mentioned, the cost of owning a home directly correlates to the sq. footage. More squares, more money.

      Great advice on the approval process for the mortgage though. You had those issues and how many years ago was that? Lending standards are much tighter now. Something that was annoying for a bank back then could be grounds to cancel the mortgage now.

  3. Rs says:

    Nice article! Very informative in a non intimating way 🤓. I might make a note that USDA also has an income limit and USDA also includes all of the income earners in the household in that limit.

    • Cash Flow Celt says:

      Great points about the income limits and what “income” means in the scope of a USDA. Perhaps in the future I’ll do an article just dedicated to FHA and USDA to really spell out what those programs means for a buyer.

      Thanks for reading!

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