saving for down payment

Home Buying Myths Busted

5 Common Home Buying Myths Busted

There is so much to consider when buying your first home. Advice often pours in from well-meaning parents and friends, which can contradict what you’ve read in your online research and received from your mortgage lender and real estate agent. What we do know is that licensed mortgage lenders and real estate agents are the professionals you should turn to for specialized advice and who we have turned to debunk these five homebuying myths.

1. You must have a 20% down payment.

While a 20% down payment can keep you from paying private mortgage insurance on a conventional home loan until you have obtained 80% equity, you can qualify for a home loan with a much lower down payment.

With a good credit score, you can purchase a home with a conventional mortgage with a 3% down payment. FHA home loans will accept a 3.5% down payment. VA home loans and USDA home loans have a zero down payment requirement, but they have additional lending criteria.

2. The down payment is the only money that needs to be put down to qualify for a home loan.

Saving for a down payment is often the focus for first-time homebuyers, but more funds are required to cover additional fees and closing costs. Homebuyers are responsible for the cost of the home inspection, home insurance, property taxes, and closing costs which are approximately 4% of the purchase price. If you get pre-qualified for a home loan with a reputable mortgage lender, they will provide a home budget and estimate your additional costs.

3. You must have a high credit score to qualify for a home loan.

The average FICO® score on all loans closed in February 2021 was 753, according to the Origination Insight Report by Ellie Mae. While lending criteria have tightened this past year, and a higher credit score will help you receive a lower interest rate and loan terms, don’t despair if your credit score is less than perfect. There are still many mortgage loan options for home buyers with lower credit scores.

Here’s a guide to the minimum credit scores for the four most common home loan programs. Each mortgage lender will have their own lending criteria.

  • Conventional loans usually require a 620 minimum credit score, but a higher credit score can help you to receive the lower “advertised” rates.
  • Depending on your down payment and debt-to-income ratio (DTI), you can qualify for an FHA home loan with a 580 credit score, and maybe even lower with a higher down payment. Still, most lenders will require at least a 620 credit score.
  • Most lenders require a minimum credit score of 640 for a USDA loan, though some may go as low as 580.
  • The Department of Veterans Affairs doesn’t technically have a minimum credit score to qualify for a VA home loan, but most lenders will require a minimum credit score between 580 and 620.

4. There’s a perfect time of year to buy a home.

Spring is often seen as the best time of year to buy a home. It is often the most competitive time to search for a home, which can drive up prices. Warmer weather is more conducive to house hunting, and families want to get settled in a new home before the new school year. Winter, particularly around the holidays, is often less competitive but usually has less inventory. Additional factors such as interest rates and location can also impact the market any time of the year.

The best time to buy a home is when you are financially prepared. You have been pre-qualified with a mortgage lender and have received a home purchase budget. A mortgage lender will provide a savings goal for your down payment and closing costs, review your credit score and credit report, and advise what your debt-to-income ratio should be. Ideally, you will have some additional savings to cover moving, furnishings, your first few mortgage payments, etc. When you have met these criteria, then that is the perfect time to buy your home.

5. You do not need a home inspection.

Home inspections are optional. If you are buying a home in a competitive market, it might be tempting to waive your right to a home inspection to make your offer look more attractive to the seller, but this could be a costly mistake. The home inspector works for you and will identify any potential issues with the property before committing to the purchase.

A licensed home inspector will provide a complete report of the home’s condition, such as the foundation, electrical wiring, plumbing, age and condition of the roof, HVAC system, etc. If the home inspector identifies any issues during the home inspection, you can use the report to request the seller to make the repairs or to negotiate a lower purchase price for you to make the repairs before purchase.

5 Ways To Fill Your Pipeline With Millennial Homebuyers

At the conclusion of 2019, prior to the Coronavirus changing the way we live and work, Millennials – those born between 1981 and 1996 (turning 25 to 40 in 2021) – had a 47%1 share of primary home loan originations of the market.

As 2020 progressed, and office workers began working from home, with many arrangements now becoming permanent, Millennials seized on the opportunity provided by low rates to stop renting in expensive cities and purchase a home in an affordable suburban neighborhood or small town.5 This change has seen the year ending with Millennials now making over 60% of the home purchases.2

In 2021, a significant wave of millennials will be 30-353, the prime homebuying age for first-time buyers. How do you fill your pipeline with Millennial homebuyers and position yourself to capture their repeat business and referrals? Here is what we know about this group of homebuyers and how a custom-branded FinLocker can turn loan originators into trusted advisors with customers for life.

1 – Millennials are struggling to save for a down payment.

Student loans, car loans, credit card debt, and increasing rents make it difficult for most homebuyers to save for a down payment. Debt delays 75% of buyers aged 22 to 29 from saving for a down payment or buying a home for 1-3 years, and 48% of buyers aged 30 to 39 years are delayed 5 or more years.4 Yet for 85% of buyers aged 22 to 29 and 72% of buyers aged 30 to 39, their savings is the primary source for their down payment.4 To become a homeowner, Millennials first need to learn to manage their debt and start saving.

How FinLocker can help Millennials save for their down payment:

The FinLocker financial super-app provides practical budgeting and saving tools to keep Millennial homebuyers focused on their homeownership journey. Whenever there’s a change to their credit score, they keep their budgets on track (or get off track), and make progress towards achieving their savings goals, users will receive a notification through the FinLocker mobile app.

2 – Millennials are burdened by student debt.

According to the National Association of Realtors, 76% of consumers claim student debt impacts their ability to purchase a home5; 38% of homebuyers aged 30 to 39 years have student debt with a median amount of $34,000.4

Student debt often affects a homebuyer’s debt-to-income ratio, contributing to a low credit score. These two factors were cited by 55% of buyers aged 22 to 29, and 67% of buyers aged 30 to 39 as the reason their mortgage application was rejected.4

How FinLocker can help Millennials overcome their student loan debt:

Rather than turn away over half of your Millennial clients for not being mortgage ready, nurture them with a FinLocker. When your clients enroll their credit and debit accounts, the FinLocker Spending Analysis will categorize each transaction to identify where they can cut back on spending, pay down their student debt and credit cards, and begin to save for their down payment. With regular engagement, FinLocker customers will start to see their credit score improve and their debt-to-income ratio lower.

3 – Millennials are tech-savvy and expect their homebuying vendors to be, too.

Millennials are keenly aware of the convenience of online shopping, digital tools, and apps. They expect the vendors involved in their home buying transaction to provide the same convenience. The first step of most millennial homebuyers as they begin the home buying process is to look online for properties for sale (43%), followed by looking online for information about the home buying process (17%), with few (7%) contacting a bank or mortgage lender first.4

How FinLocker can help you to attract and engage tech-savvy Millennials:

Target your online marketing to Millennial homebuyers who are early in their homebuying process. Promote the offer to give first-time homebuyers a free financial super-app, aka your custom-branded FinLocker, to every new client that gets pre-qualified. Once they are pre-qualified and you’ve identified any impediments to them purchasing a home in the short term, invite your clients to create a FinLocker to interact with the app’s financial tools to correct the barriers you identified.

4 – Millennials need assistance overcoming the most difficult steps of the home buying process.

Millennial homebuyers in 2020 cited “finding the right property,” “paperwork,” “understanding the process and steps,” and “saving for the down payment” as the four most difficult steps of the home buying process. What’s more, 63% of Millennials found the home they purchased on the internet.4 The internet is filled with websites that Millennials can use to obtain homeownership education, but if they stumble across the lead gen resources created by your competition, how likely are they to return to you for their mortgage?

How FinLocker can help Millennials get mortgage ready:

A custom branded FinLocker will help you remain top of mind with your borrowers as they engage with the app to address each step in the home buying process. When they’ve saved their down payment and have taken the readiness assessment, they can begin their Property Search in the app. FinLocker also provides secure Document storage, so the homebuyer can securely transfer their financial documents and assets to their loan officer when they are ready to complete their mortgage application.

5 – Millennials can be a top referral source.

An investment in customer satisfaction is an investment in your company’s future. Satisfied clients are more loyal and will be the promoters of your business. In 2020, 87% of consumers began their lender search with a referral or an existing relationship.6 How will you become the mortgage lender your clients recommend to their homebuying friends and colleagues? Stand apart from the competition by becoming a trusted advisor who provided your Millennial clients with the financial tools to improve their credit score, help them save for their down payment, and ultimately increased their purchasing power.

How FinLocker can help your Millennial homebuyers become customers for life:

Client engagement with your custom-branded FinLocker doesn’t end at the closing table. Homeowners can continue engaging with their FinLocker indefinitely as they save for future home repairs, build an emergency fund, and plan to achieve their next financial goals. As the provider of this useful financial tool, you’ll remain their lending contact, keeping you top-of-mind when they are asked for a referral to their mortgage lender.

To find out how a custom-branded FinLocker can be used to attract more Millennial clients to your loan officers, contact us to schedule a demo.

 

1 Realtor.com, Q4 2019 Generational Propensity Report: Generation Z Enters the Housing Market
2 Ellie Mae, Ellie Mae Millennial Tracker
3 Deloitte Insights, U.S. Census Bureau International Demographics via Haver Analytics
4 National Association of REALTORS®, 2020 NAR Home Buyer and Seller Generational Trends
5 National Association of REALTORS®, The Impact of Financial Literacy on Homeownership: Student Loan Impact
6 STRATMOR Group, How to Become the Mortgage Lending Choice of Millennials

Giving and Receiving Gift Money For A Down Payment

If you are saving to purchase a home, receiving money to put towards your down payment and closing costs can help make your homeownership dreams come true sooner.

If you receive a check towards your down payment, you might assume that you can simply bank the check into your savings account. However, using money that’s been gifted to purchase a home is not as cut-and-dried as that. There are specific guidelines you must follow, so you don’t jeopardize your home purchase.
We recommend sharing this article with each donor, so they know their obligations, too.

What to know if you are receiving gift money

When you apply for a home loan, you will be required to provide recent bank statements. During the underwriting process, the underwriters will review all your assets and require confirmation that any large deposits outside of your regular paycheck are your legitimate assets.

Any monies that have been gifted must be supported with a gift letter from the donor stating that the money is a gift, not a loan, and does not need to be paid back. The amount that you’ve deposited must exactly match the amount stated in the gift letter. Any expectation of repayment will affect the amount of your mortgage approval.

The current limit to receive a monetary gift tax free is $15,000. You will be taxed for monetary gifts above $15,001. However, multiple donors can gift you up to $15,000 each, providing they each provide you with separate documentation.

Read the IRS guidelines on gift taxes >

How a monetary gift can affect your eligibility for a specific home loan program

Some loan types have strict guidelines regarding how much money a borrower must personally contribute to the down payment, in addition to any monies provided as a gift. Here are some rules about gift money as it relates to four of the most common loan types.

Conventional home loan  – The borrower is not required to contribute to the down payment from their own funds when purchasing a primary residence. All funds can be a monetary gift. Read the Fannie Mae guidelines for personal gifts >

FHA home loan – If you have a credit score of at least 620, the full amount of the minimum 3.5% down payment for your primary residence can be gift money. The gifter will need to provide a bank statement. Read the FHA loan rules on down payments and gift funds >

VA home loan – Gifted funds may be used to pay the VA Funding Fee and other loan costs. The gifter is not required to furnish a bank statement. A canceled check is enough proof for documentation. Read about who can pay for the VA funding fee and loan closing costs >

USDA home loans offer zero down payment loans to purchase properties in specific geographic regions. Still, borrowers can use gift funds for closing costs as long as they can be verified and meet other loan program and lender requirements. Read about Gift Funds on page 30 >

Before qualifying for a home loan, we recommend that you speak to a licensed loan officer for advice on using a monetary gift for your home loan down payment. Both the gifter and the recipient should also speak to a professional tax advisor, too.

What to know if you are giving gift money

Provide the recipient with a gift letter stating that the money is indeed a gift, which is not repayable. The gift letter should include the following information:

  • Donor’s name, address, and phone number
  • Donor’s relationship to the recipient
  • Exact dollar amount of the gift
  • Date the funds were transferred
  • Statement from the donor that the money is a gift and no repayment is expected
  • Address of the property being purchased, if known at the time
  • Both parties sign and date the letter

The donor should be prepared to provide a bank statement to show the full amount being deducted from their account.

A single donor can give a monetary gift tax free to the recipient up to $15,000. If you want to give more, you and your spouse, or another relative, can each give the homebuyer an amount up to $15,000. However, each donor must provide the recipient with a gift letter and be prepared to provide bank statements to document their specific gift amount.  Read the IRS guidelines on gift taxes ><

Who is eligible to give a homebuyer a monetary gift?

Depending on the type of home loan you are using to finance your home purchase, each program has its own guidelines that state who may give a down payment gift.

Conventional Home Loans through Fannie Mae or Freddie Mac require the gift funds to be furnished from a relative, which they define as the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship. Gift funds can also be provided by a fiancé, fiancée, or domestic partner.

FHA Home Loans will accept monetary gifts from relatives. Additionally, the FHA will allow gifts from close friends who have a clear interest in your life.

The FHA also allows for gifts from an employer, labor union, charitable organization, and government agency or public entity that provides homeownership assistance grants or programs to low-to-moderate income or first-time home buyers.

USDA and VA don’t have many restrictions on who can give you a financial gift towards your down payment.

All home loan programs have the stipulation that an interested party can’t provide financial gifts. An interested party is someone who is involved in the transaction directly or indirectly, such as the seller, builder, developer, or real estate agent. Gifts from these sources are considered inducements to purchase and must be subtracted from the sales price.

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