Things You Cannot Control

There are a number of factors outside your control as you try to buy a home. Gaining a solid understanding of these limitations and learning how to overcome them are crucial to your success as a home buyer.

Home Prices and Interest Rates

Home prices and interest rates are the 2 biggest things that impact how much you’ll pay each month when you buy a home. For example, if you purchase a home with a 30-year $100,000 fixed-rate mortgage loan with a 4.5% annual interest rate, you will have a $507 mortgage payment each month for the next 30 years. You’ll end up paying more than $180,000 total by the time you finish repaying your loan!

You can’t control how much a home costs or what terms a bank will offer you for a mortgage. However, you can look for a home that is in your price range and find a lender that’s a good match for you. The best way to do that is to have a good realtor. Your real estate agent should have a solid understanding of how much homes cost in the areas where you are considering purchasing a home. Your real estate agent should also know how you can get the best possible interest rate on your loan. DB101 has information that can help you find a real estate agent.

Loan Programs

There’s no way for you to control what loan programs are available at any specific point in time, what their terms are, or how much they will charge in interest or fees.

In recent years, there are 3 main home-loan options:

  1. Conventional loans: These loans, offered by banks and mortgage lenders, typically require the borrower to make a down payment of at least 10% of the purchase price.
  2. FHA loan: Federal Housing Administration (FHA) loans are also offered by banks and mortgage lenders, but are insured by the federal government. They are popular because they let buyers make much smaller down payments — usually 3.5% of the purchase price — and they are typically available for people with lower credit scores.
    • 208 loans: These are a type of FHA loan for people with disabilities that let you take out a mortgage that is greater than the home’s value — up to 120% — to make accessibility modifications to the home after you buy it.
  3. VA loans: Veterans Administration (VA) loans are only available to military veterans. These loans can sometimes supply 100% financing — that means no down payment is required by the borrower.

Down-Payment Programs

As you consider loan options, it is important to understand that the type of loan you get is not the only thing that will impact how much money you need to save up. For one thing, there are programs that can help you with your down payment so that you don’t need to save up as much as you may think. On the other hand, you may need to make sure to have money for closing costs, making accessibility modifications to your home, or other expenses.

Here are some ways you may be able to get help with your down payment:

  • Some cities and counties offer financial help that may reduce your portion of the down payment to as little as 1% of the purchase price. The rules are different for every program, but usually you do not need to repay this financial help until you sell your home or you have finished paying off your original mortgage. In some cases, you may not have to repay the loan at all.
  • Some lenders have programs that can help reduce your portion of the down payment to as little as 0.5% of the purchase price.
  • Your family may be able to help with your down payment. Gifted funds are allowed on most types of loans. There are tax implications for the person supplying the gifted funds, but the amount of the gift is not usually limited.
Example

You find an FHA loan that only requires a 3.5% down payment. The city where you are purchasing your home has a program that will actually pay most of your down payment! After the city pays its share, you end up just paying a 1% down payment!

You still have to deal with closing costs, which are usually around 3% to 5% of the price of the property, more than you are actually spending on the down payment. Some cities have programs that help with these expenses and sometimes you can negotiate with the seller of the property to pay all or part of them for you.

Government Benefits

There is a lot of misunderstanding regarding government benefits and homeownership. Here are some facts:

  1. No government benefit can be taken away because you buy and own your own home.
  2. Some benefits, such as Supplemental Security Income (SSI) and Nutrition Assistance (formerly Food Stamps), may limit how much money you can have in your bank account, thus making it more complicated to save money for a down payment.

For people with disabilities who get SSI benefits, the basic problem is that they can only have $2,000 in resources ($3,000 if you’re married). This limitation makes it hard to save for a decently sized down payment. However, there are a few ways for you to get around this limitation:

  • You can find a local down-payment assistance program.
  • You can use gifts from other people for the down payment.
  • You can save money in a federally funded Individual Development Account (IDA)

Individual Development Accounts (IDAs)

An Individual Development Account (IDA) is a type of savings plan for people with low income that is offered by nonprofit agencies in some Arizona communities. When you open an IDA, a special bank account is set up, and as long as your IDA is federally funded, all the money that is deposited into the account does not count towards the $2,000 resource limit ($3,000 for couples).

For most IDAs, the nonprofit agency will match your contribution. For example, if you deposit $25 per month, the nonprofit agency may also contribute $25 to your down payment, or perhaps even more. This makes an IDA a fantastic way to save! Not only are the funds protected, you basically get free money help with your mortgage as you go along.

An additional benefit of an IDA program is that participants get free credit repair and financial education classes that help prepare them for homeownership. These mandatory classes are a fantastic additional resource for first-time homebuyers.

There are some limitations with IDAs. Usually the maximum savings are limited to a few thousand dollars, and there is usually a period of time when monthly contributions are required — often 12 months or longer — before the money can be used for homeownership.

IDAs are discussed in more detail in the DB101 article on Individual Development Accounts.

IDA savings scenarios

Your monthly contribution

The match offered by the IDA program

The total amount of money you would have 1 year later for purchasing your home

How much money you can save in an IDA in different situations

$25 per month

1:1

$600

2:1

$900

$50 per month

1:1

$1,200

2:1

$1,800

$100 per month

1:1

$2,400

2:1

$3,600