The single biggest drawback for prospective homebuyers is money for down payment and closing costs. Most buyers simply don’t want to drain their savings to purchase a home. However, there are paths to homeownership where you may not have to.
It is no secret that loan programs have changed dramatically since the mortgage collapse. Long gone are the stated income and no money down programs. However, there are options that can greatly reduce the money need to close. Between lender credits, seller concessions and new loan programs you may not need as much money to close as you think. Don’t let a lack of savings or an unwillingness to dip into your accounts dissuade you from homeownership. Here are four options you can use to greatly reduce the capital needed to close.
Sellers concession. The first option you have if you are looking to limit your closing funds is a seller’s concession. On the surface this seems a bit complex, but in reality, it a simple concept. For the sake of round numbers let’s say the seller wants to walk away with a net of $300,000 from the sale and you want a 3% concession. Under this scenario the seller would bump the sales price up to $309,000. This would give you $9000 for closing costs and prepaid escrows while still allowing the seller to net their $300,000. For this to work the home must appraise for the higher amount of $309,000, not $300,000. Your loan amount will be a little higher, but you can get up to 6% in sellers’ concession under most loan programs and if the seller agrees.
Seller credit. There is a difference between a seller concession and a seller credit. With a concession the seller bumps the sales price and provides a concession off the new amount. With a credit the purchase price is the same, with the seller giving a credit off that number. Let’s say that you want a $3,000 credit for some repair items needed in the property. The seller would essentially give you a credit for that amount to be used for closing costs and property taxes. The sales price is the same, but with the credit you can bring $3,000 less to the closing.
Interest rate credit. Most buyers are unaware that they may be able to get a credit for their interest rate. On almost every loan the lender will provide you a handful of different rate options. You could buy down the rate by bringing money to the closing to get the lowest rate possible. This also works in reverse. You can increase your interest rate and get a credit from the lender. At 4% you may be close to what is called par, where you don’t pay for the rate or get a large amount of credit. But, at 4.5% you may get a lender credit for $3,000, or more. Depending on how long you plan on staying in the property, the size of your loan and your capital position this may make sense.
Different loan program. Not every loan program requires a 20% down payment. There are several new programs hitting the market every day. The standard minimum down payment option is an FHA loan, which requires just 3.5% down. However, there are also options for 3%, and even some for just 1% down. Most of these programs require credit scores over 720, with low debt to income ratios. If you have a strong credit profile, you may be eligible for one of these programs.
Don’t let a lack of capital keep you from exploring homeownership. There are several ways to reduce the amount of money you need to bring to closing.