Getting A Tax Refund? Put It Down on Your First Home

What are you doing with your tax refund? Are you trying to save up for a home of your own? Coming up with a down payment for your first home seem like an impossible task?

You’re not alone. The number one problem cited by first-time homebuyers is the difficulty they have saving for a down payment on a new home. It’s not surprising with stagnant wages and high rent. However, this is a perfect season to boost in your down payment. Use your tax refund.

Having just a 3% down payment is enough to qualify you for a mortgage. Really. That means you would need $3,000 down for a $100,000 home. According to the real estate website, Trulia, the average home sale price in the Dayton area in 2017 was $115,500. You could buy that average priced Dayton metro area home with just $3,468 down. If you only consider the City of Dayton, your are looking at an average home priced at $56,900 and just $1,707 down. Of course, the more you can put down, the better off you will be in the long run. Higher down payments can lead to better interest rates and potentially avoiding Private Mortgage Insurance (PMI). Both of these would save you many thousands of dollars over the length of the loan.

Now, let’s get back to your tax refund. According to the IRS, the average tax refund in the spring of 2017 was $3,050. That would make up a serious chunk of your down payment. Of course, not everyone is getting a tax refund of that magnitude. However, if you are planning to buy in the next few years, you have time on your side. Only getting a few hundred dollars back from the government this year? Put that money into a separate savings account. Add more to the account every month along with future windfalls, and your down payment will grow quickly.

Before you spend your tax return on something else, ask yourself what are your priorities? Would you rather grow your down payment or buy a new flat screen TV? If your priority is to buy a new home, then take the road towards homeownership; use your tax refund to grow your down payment fund.

Having Enough for a Down Payment May Not Be Your Only Obstacle.

If you’ve been struggling to put together a down payment, you might need to take a closer look at your finances to determine if you really are ready to buy a home. Your new house payment could very well be much lower than your monthly rent. However, a new home also comes with other expenses like homeowner’s insurance, taxes, and home maintenance. It’s wise to go into your new home with an emergency savings that you can use to make unexpected repairs. For instance, when your furnace breaks down, you have to pay for the repairs on your own.

If you want to know if you are ready to buy a home of your own or want someone to review your finances, contact the HomeOwnership Center and we’ll give you our expert advice.


Student Loan Debt and Buying a Home

If you have a lot of student debt and you are trying to buy a home of your own, you may quickly realize that your student debt is an obstacle. Why do a lot of student loan debt and buying a home not play well together?

Student debt and back end Debt -to-Income Ratio (DTI): When applying for a mortgage loan, lenders will calculate your DTI. Basically they are comparing your income to your monthly debt payments. (Learn more about back end DTI here.) They want to know if you can afford the monthly payments on a home when considered with all of your other monthly debt payments. The more debt you have, the higher your DTI.

If your back end DTI exceeds the limit set by your lender (typically 43% or less) your mortgage application may be turned down. Even if you are approved for a mortgage, your DTI may still affect your ability to obtain down payment assistance. (HomeOwnership down payment assistance programs require a maximum back end DTI of 42%.)

How is your student loan debt calculated into your DTI? Lenders may use one of two different methods to determine your student loan payment on your DTI.

  • The 1% method: Some lenders simply determine 1% of your total student loan debt and use the resulting figure as your student loan’s contribution to your back end DTI. This method may work against you, especially if you are on an income based repayment program or have extended your student loan term beyond ten years.
  • The actual payment method: Using this method, the lender uses your actual monthly student loan payment as input to your back end DTI.

Which method will be used? That depends on a lot of factors. Are your loans in deferment? Are you on an income based repayment plan? What kind of mortgage will you have (FHA, VA, conventional, USDA, etc. Determining the method used can be complicated, so don’t be shy about asking lenders how they will consider your student loan payments when calculating your back end DTI.

None of this is to say that you can’t buy a home when you have student loan debt. People with student loans buy homes every day. However, having a lot of student debt can be a big road bump for may people on their road to homeownership.



Up to 20% Homebuyer Assistance in Dayton

The HomeOwnership Center of Greater Dayton, in partnership with the City of Dayton, announced today that it will support first-time homebuyers purchasing in Dayton with up to 20% of the home’s purchase price in the form of down payment and closing cost assistance.

Having funds for a down payment is often the biggest challenge faced by potential homebuyers. Even with special loan programs designed for first-time buyers, upfront costs can run $5,000 – $9,000 – a daunting figure for those saving a modest amount each month toward the goal of purchasing a home.

Addressing this challenge along with offering an incentive to buy in Dayton, the HomeOwnership Center is increasing the amount of assistance available to qualified low-to-moderate income homebuyers to a maximum of twenty percent of the purchase home’s price, up from ten percent. The increased assistance may mean the reduction or elimination of private mortgage insurance costs and save the homebuyer thousands of dollars over the life of the mortgage. The funds are offered as a 0% deferred second mortgage, which is repaid when the property transfers.

“This program makes it possible for first-time homebuyers to invest in their own future rather than paying rent, which is often higher than a mortgage payment in our market,” says Beth Deutscher, executive director of the HomeOwnership Center. “We also want buyers to be sustainable, rather than spending all of their reserves on the purchase and then not being able to handle repairs and other responsibilities of owning a home.”

The program is funded by City of Dayton HOME dollars, a federal allocation from HUD intended to increase affordable housing opportunities at the community level. Buyers participate in classes and coaching from certified advisors at the HomeOwnership Center as part of the program, aimed at empowering them to make good decisions as they move through the process of purchasing a home.

“With the expansion of the Dayton Homebuyer Assistance Program, we are helping to close the affordability gap for low-to-moderate income families. Placing homeownership within reach for our working families leads to stronger families, stronger neighborhoods, and a stronger Dayton,” said Mayor Nan Whaley.

Have You Saved Enough Money to Buy a Home?

Do you have enough money for a down payment, for closing costs, and to have an emergency savings fund?

Typical mortgages will require you to have a down payment equal to at least 3% of the home’s purchase price. On the other hand, some specialty mortgage products (such as VA loans and Rural Development Loans) may not require any down payment at all. However, the more money you can put down on your new home, the better off you will be. A low down payment can lead to higher interest rates and requirements for you to have mortgage insurance. Each of these will significantly add to the long term cost of the home. The bottom line? On its own, not having a 20% down payment should not be a stumbling block to buying a home.

You will need more than just a down payment. When you buy your home, you will also need to pay closing costs. Closing costs represent the actual transactional costs of buying a home. Those costs can include loan application fees, taxes, title searches, home inspections, and more.  It is important to understand that closing costs represent actual costs and are not based upon a percentage of the home’s selling price. Closing costs do not have to be covered by the homebuyer. You can negotiate to see if the seller will pay all or a portion of the closing costs. Your lender may also be willing to roll the closing costs into the loan.

You should also have money set aside for an emergency savings fund. It’s pretty rare these days for a lender to require that you have some kind of cash reserves. However, as a homeowner, you will need cash that will allow you to make repairs to the home as they become necessary. When a storm blows a branch through a window or your hot water heater goes out, you are the one that will need to make repairs and replace equipment.

What can you do when you haven’t saved enough money to buy a home?

Recent polls have shown that saving up for a down payment is the largest hurdle for first time homebuyers. Many people don’t understand closing costs or the need to have an emergency savings account. If you are struggling to save the cash required, we might be able to help. The HomeOwnership Center has Down Payment Assistance programs and Financial Fitness classes that can make a real difference to you.

This is the second post in the series, Are You Ready to Buy Your Own Home? You can read the other installments in the series by following these links:

Part One: Is Your Credit History Good Enough to Buy a Home?
Part Two: Have You Saved Enough Money to Buy a Home?
Part Three: Are You Mortgage Ready?
Part Four: Are You Planning to Stay in the Home for the Next 5 to 7 Years?
Part Five: Are You a Realistic Homebuyer?
Part Six: Do You Know Enough About the Homebuying Process?

Is Your Credit History Good Enough to Buy a Home?

Buying your first home is not easy. Especially post recession, when the banks tightened up on their lending requirements and consumer protection regulations have changed.  The homebuying process requires discipline, commitment, and a willingness to climb the steep learning curve to becoming a homebuyer.

However, interest rates are still a tremendous bargain and homeownership is extremely affordable. In most cities, owning a home is much cheaper than renting an apartment. If you are ready, this is the perfect time for you to pursue your dream of buying a home.

How do you know when you are ready? This is the first in a series of posts in which we’ll present some simple questions that will help you determine if you are financially and emotionally ready to buy a home. Let’s get started:

Part One: Is Your Credit History Good Enough to Buy a Home?

A good credit history is one of the biggest stumbling blocks for first time homebuyers, second only to having enough cash for their down payment. Why is a good credit history so important?

We mentioned that lenders have been tightening up on their lending requirements. That means they are looking for people with good credit histories.  You can bet that your lending officer will be looking at your credit history and credit score. What will they be looking for? A high credit score.

Lenders give the best mortgage interest rates to people with high credit scores (740 and higher). However, you may qualify for a mortgage with a credit score as low as 640 or in some special circumstances, even lower. The downside is that a lower credit score will mean you will pay higher interest rates, costing you far more money over the length of your mortgage than the cost to someone with a high credit score.

Low credit scores can also mean you will be required to have a bigger down payment. If you are already struggling with your finances, coming up with even more cash to use for a down payment might prove very hard to do.

A bad credit history may also tell a loan officer that you struggle to manage your finances. Do you have trouble paying your bills in full and on time every month? Do you have too much debt? When asking a bank for $100,000 to buy a home, they want to know that you can handle the payments and that they will get a return in the investment that they are making in you.

What can you do when your credit history doesn’t measure up?

If your credit history is not good enough to buy a home, you should take the time needed to improve your credit before you apply for a home mortgage. This means establishing an on-time payment record and paying down your debts. The Mortgage Ready program can help by turning your finances around. You will learn good financial skills, credit management and financial goal setting.

This is the first post in the series, Are You Ready to Buy Your Own Home? You can read the other installments in the series by following these links:

Part One: Is Your Credit History Good Enough to Buy a Home?
Part Two: Have You Saved Enough Money to Buy a Home?
Part Three: Are You Mortgage Ready?
Part Four: Are You Planning to Stay in the Home for the Next 5 to 7 Years?
Part Five: Are You a Realistic Homebuyer?
Part Six: Do You Know Enough About the Homebuying Process?