Today I’m posting tip #3 of a 10-part series on tips you need to know before you start your house hunt.

TIP #3. Down Payments

In most cases, to purchase a home you will need a down payment. Down payment requirements vary, depending on the loan type. Most conventional loans currently require 10 – 15% down, depending on the location of the property. FHA home loans require 3.5% down and VA home loans will still allow a veteran to buy with ZERO down payment.

One reason for finding a knowledgeable lender, especially if you are a first-time homebuyer, is so you can become educated on the options best matched with your personal and financial situation. Those options could include down payment assistance in the form of a silent 2nd or a grant. It always helps to work with a lender that is knowledgeable in first-time homebuyer financing. Someone used to “writing” large loans with substantial down payments may not be “up to speed” on the grants or silent second loans available in your area.

A silent 2nd is a loan that has a fixed interest rate. The interest is calculated only once at the beginning of the loan. On a silent 2nd there are no monthly payments due. The entire amount is due at the end of the 30-year loan or when the loan is paid off through refinancing or selling the property.

A grant is money that is given to a buyer for their down payment and is forgiven over a certain period of time. Most grants are forgiven over a five-year period – 20% per year. If you were to sell within the five-year time frame, you would have to pay back the grant on a prorated basis.

Currently, in California there are two grants available:

1.) The first grant can make up the difference of 3% of the down payment or closing costs for an FHA or VA loan.

2.) The second grant is available only to first-time homebuyers and can be used for down payment, closing costs, or upgrades to the home.

Both grants have income limitations (restrictions on how much income you can have, based on household size).

Often, city governments will have federal funds to be used in their affordable housing programs. Mostly they fall in the silent second category. They are not always administered by the city, but by a separate entity. In California, Mercy Housing fulfills many of those functions.

Additionally, gift funds are an acceptable source to pay for your down payment or closing costs. This is another reason to reinforce why it is important to communicate with your lender. Inexperienced lenders may assume that your funds are coming from one source, when they will actually be coming from a gift. Be sure to discuss this option with your lender up front. It will be important (and required) to document the sourcing of your funds.

Because funds must always be documented for your down payment, cash from your piggy bank is not acceptable. So if you’re inclined to cash your pay check and pay cash for groceries, utilities and other purchases, my advice is to keep as much in the bank as possible. Redepositing monies saved at home is not wise and can delay a loan and the time needed to close.

Finally, always be sure to have a frank discussion with your lender upfront about the cash necessary to buy a home, so there will be no surprises in the 11th hour. Remember, an earnest money deposit, as well as a home inspection, will be a part of your sales contract. They will need to be paid in advance of closing, but will be applied towards the final closing dollars.

Ingrid Pierson (530) 885-1545 ipierson@teamvitek.com Licensed – NMLS # 233666