Jen’s Advice to Newlyweds
About Home Buying
Article + Photos Courtesy of | Jen Zweiacker of Zweiacker & Associates
Dear Jen,
My name is Kelsey, and this fall I’ll marry my best friend and the love of my life, Trent. I have dreamed of my wedding day since I was a little girl… the dress, flowers, my family and friends, the music and dancing… but with COVID-19 it looks like I won’t have my dream wedding. That’s where Trent and his logical mind come in.
We’ve been saving for our wedding for over a year and our parents were helping with the costs. Our plan was for my roommates to move out of my apartment and for Trent to move in while we saved for our first home. Our monthly rental amount for that full apartment is $1,550 plus utilities. Even with the deposits that we are losing, we have $26,500 saved. So, Trent had the idea that we go ahead and invest in our first home together! Although I’m sad about not having my dream wedding, I am marrying my dream guy and maybe we can begin our new life together in our dream home!
So, my question for you is can we afford a down payment on a home with the money we have saved and keep our payments under $1,800 per month?
Thank you in advance for any advice that you can give to us!
Kelsey
First, I want to say congratulations to you and Trent on your upcoming marriage. Second, congratulations on your fiscally responsible alternative to a challenging situation.
I’ll start with general down payment guidelines for home loans. Please keep in mind there are many loan products available. An experienced Realtor will take the time to understand your needs and situation and can match you with one of the many quality mortgage lenders in our area. The three most common loans are FHA, Conventional, and VA.
We often see that first time home buyers take advantage of the low down payment requirements of an FHA loan. An FHA loan is a federally backed loan and will require a 3 ½% down payment. If your down payment is less than 20% of the sales price of the home, you will be required to also pay mortgage insurance as part of your monthly payment. Mortgage insurance benefits the lender only and not you, the borrower. In recent years, the guidelines for mortgage insurance on an FHA loan have changed so that the borrower is required to pay the mortgage insurance for the life of the loan.
Conventional loans generally require a 5% down payment. However, there are some 3% down payment products available. A conventional loan will also require the borrower to pay mortgage insurance. However, once the loan reaches an 80% loan to value percentage (per the amortization schedule from the date of the loan), the mortgage insurance will be dropped from the monthly payments. Borrowers may also request the PMI be dropped before the date indicated by the initial amortization schedule. How that request is handled is 100% at the discretion of the loan servicer. Some will require an appraisal to show that the loan to value based off of appreciation and the current value of the home is 80% or less. A servicer may also flatly deny the request with no explanation. If that happens, the borrower can also refinance the home.
VA loans are loans for those who have served our country. Veterans can qualify for these loans with $0 down. These loans don’t require mortgage insurance.
Kelsey, you and Trent could do an FHA loan with 3 ½% down on a $240,000 home and have a monthly house payment of just under $1,800. That includes $169 per month in mortgage insurance. Your total cash to close (including your inspections and appraisal) should range between $15,000 and $16,000 with down payment and closing costs. That leaves you with a house payment that is comfortable for you and some savings.
You can also go the conventional loan route with 5% down. If you decide to pay monthly mortgage insurance, your monthly payment will be approximately $1,772 for a $250,000 home. Your total cash to close at that price point would be $19,000 – $20,000.
If you went with a conventional loan and opted to pay up front mortgage insurance, you could purchase a $260,000 and pay approximately $3,750 in upfront mortgage insurance (the exact number depends on many factors including your debt to income ratio, the loan to value ratio, credit scores, etc.), your monthly payment would be approximately $1,723. Your cash to close would be approximately $24,250.
As you can see, you have saved more than enough to purchase your first home. I encourage you to review your finances to make certain that you calculate enough for travel, going out to eat, gym memberships, shopping, and other daily/monthly expenses. You don’t want to regret your home choice if your monthly payment does not allow you to do the things that you want and need to do.
One of the many qualified lenders in the Bryan/College Station area can review your individual situation and advise you on the best loan product for your particular needs.
Congratulations on this exciting new chapter in your life and on taking a disappointing situation and turning it into a wise investment in your future.
Best Wishes,
Jen
Jen Zweiacker of Zweiacker & Associates is an expert in real estate and loves to help newlyweds find their perfect home. To connect with Jen and her team, visit zarealestate.com or call 979.450.0455 today.