North Sound Property News

My friend asked:

What are my smartest options for financing? Like here, with the salary I’m making now, I might qualify for one of those first-time homeowners loans. What’s the minimum I could have saved and still buy a house? You mentioned borrowing against your 401(K) before. How does that work? What’s the optimal combination of cash, loans, etc.?

This is not a cut and dried, black and white answer that you are looking for.  A big part of the decision to buy a home will hinge on whether or not you can find financing that makes sense in your particular situation.  Once upon a time–not so long ago–a potential buyer such as yourself could have asked me this question and I might have scoffed at the very notion of needing to have a down payment.  Sure if you had one, so much the better, but not having one wouldn’t have been a problem as I could have pointed you in the direction of many lenders who could have hooked you up with a zero down loan.  And in an appreciating market, it wouldn’t even have been THAT risky for you to go that route.  Lots of people did.

 Today, I think most responsible people in the industry are giving somewhat more circumspect advice.  I believe no down loan programs still exist for some buyers but generally today I like to see buyers coming to me with some cash to put down as it will just make the whole process easier.  Also, it indicates that the buyer has a long term perspective on their real estate purchase, which is preferable now the market is weaker.  As I mentioned in the last post, if you buy, you should be planning to stay put for a while.

Regarding borrowing against your 401K–this is an option you have for obtaining a down payment.  When my husband bought his first condo back in 2002, this is the way he got his down payment together.  There are pros and cons with this idea.  One is, if you have a well-funded 401K, this option may be readily available to you.  But you need to make sure you understand that there are some downsides as well.  One downside is that what you are doing is taking out a loan–the money has to be paid back, with interest.  If not, the IRS will call it a distribution and tax you on the amount you take out.  Talk to your financial or tax planner before choosing this option. 

Speaking of financial planners, I think it is really important for first time buyers to put together a team of advisors to help make decisions about buying a home.  You should find a realtor, mortgage advisor and a financial planner who will all be working in your best interests when you make a decision as big as this one.  You need to interview these people, ask for referrals, basically do whatever you can to make sure that you are working with people you can trust to have your long-term interests at heart.  Once you find these people, stick with them.  Many times, buyers pick the first agent they meet, or a loan officer based on the rate they offer, and often times, this is a mistake.  As Rhonda Porter says, it’s not about the rate.  It’s about picking the person and program that is best for you, and sometimes a loan with a great rate has other things about it that are not so great.  Or, sometimes a loan officer promises a great rate but can’t deliver.  So it’s really important to find people you can trust.

 Back to loan programs. One of my very favorite first-time buyer programs is the FHA loan, which has a minimum down payment of around 3%.  It’s government backed and has been around forever.  The FHA loan and it’s kissin’ cousin the VA loan that is available to veterans of the armed services, are the original loans for folks with either credit challenges or who don’t have much cash to put down.  I’ve seen FHA loans go to buyers who were just graduating from college and had no assets or credit to speak of, and whose parents were helping them get into the house.  A lender could shed more light on this but I believe you can be gifted the amount of the down payment.   The max on FHA loans as I recall is around $369,000 right now, while VA loans max out at $417,000 (the same amount as conventional loans).  I believe these limits will be increasing in the near future.

Assuming you were going to go the FHA route, the minimum you could have saved would probably be around 3% of your purchase price, plus some closing costs.  So, probably $10,000 to $15,000 if you bought up to the maximum loan amount.  The best thing to do if you begin seriously thinking about buying a home is to attend a first time buyer seminar in your area that may be put on by either a local bank, real estate office, or a local non-profit or government agency.

Speaking of government agencies, most states have programs that can provide either down payment assistance or loans for first time buyers.  Usually they have some requirements that you attend one of their classes, so I tend to think that these are a good place to go to find information about buying your first home.  In Washington state, we have the Washington State Housing Finance Commission, which sponsors one of these programs called House Key and can be a great place to begin learning about buying a home.

Other states have similar programs.  California, for instance, has the California Housing Finance Agency and Minnesota Housing has programs too (just to name a couple of states).

 Besides looking into state and federally backed loans like FHA and House Key, it also makes sense to talk to a lender about other programs that may be available.  The world of mortgage financing is constantly changing, and one of the best things a first time buyer can do is find a reputable lender to help them understand all the options.

About the Author: Sandy Kaduce is Associate Broker of Gallery Homes Real Estate. She serves buyers and sellers in North King and South Snohomish counties. She is 2009 Board President of the Mukilteo Chamber of Commerce, as well as Vice President of Site Selection for Habitat for Humanity of Snohomish County. For more information, visit Sandy on the web at www.sandykaduce.com! Read more from this author