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.


How Do the Unbanked Buy Homes?

Recently, the Dayton Business Journal had an indicating that 7.2% of Ohioans don’t have a bank account. The article goes on to say that those unbanked Ohioans pay over $65 million dollars in service fees as a result of not having bank accounts. And while that is a lot of money being paid by the folks that can least afford it, I was really focused on the prospect that people without savings and checking accounts couldn’t buy homes. Seriously, how can you hope to own your own home if you don’t have savings and checking accounts?

Loan officers ask for a lot of paperwork when you apply for a home loan, including copies of your bank statements. We ask for the same documents when you apply for down payment assistance. So, why do lenders want your bank statements? They are looking for the three C’s of underwriting a loan.

  1. Credit Reputation: Your credit score, delinquent payments, bill collections, types of credit accounts, credit balances, and credit limits all go into determining your credit reputation. The lender will want to know if you have maintained a balanced bank account with no overdrafts.
  2. Capacity: Do you have the ability to pay back the loan? Banks will be looking at debt ratios and income. They will also factor in things like cash reserves, type of loan, and employment history.
  3. Collateral: How much equity or down payment can you apply towards buying a home? What kind of property are you buying? Is the property a condo, multi family, or manufactured home? Will the property be your primary, residence, second home, or an investment property?

You see, lenders have a legal responsibility to ensure that you can be reasonably expected to repay the loan. So, they ask for your bank statements. If you can’t provide statements from savings or checking accounts, you will have a tough time providing the proof needed to answer questions about the three C’s.

At this point, we should consider another question entirely. Why is an individual unbanked? Do they not trust banks? Have they had trouble managing their money in the past and can’t open a bank account as a result? The reason I ask these questions will become evident in a moment.

If you are unbanked and want to buy a home, you could bypass the conventional lending system entirely and look at alternative methods of buying a home, such as lease to purchase agreements, private financing, and land contracts. Each of these methods has it’s own set of pitfalls that you need to understand. As a matter of fact, we have an entire web page devoted to warning you about the downside of lease to purchase arrangements. We certainly would not recommend any of these solutions to someone who is struggling to manage their finances. The risk of digging yourself into a deep financial hole is just too great.

If, you are responsible with your money and just choose to not have a bank account, a lease to purchase or land contract may be a viable option for you. However, I would still recommend that you meet with a professional housing advisor (Like the advisors at the HomeOwnership Center) so that you are fully aware of your options and risks before pursuing any of these alternative means to buying a home.

If you are unbanked because of past money management issues, the best solution is for you to tackle your financial problems head on. You need to establish good financial habits, open a savings and checking account, create a good credit history, and put money into savings.

There are other reasons for establishing bank accounts:

  • You will earn interest on the money you save.
  • Your money is safeguarded and insured by the Federal Government.
  • You will build a relationship with a bank or credit union.
  • Lenders will be able to verify your ability to save money.
  • You will gain access to other bank and credit unions services such as credit cards, car loans, and financial advice.

This is not an easy process. Building a solid financial foundation takes discipline, time, and hard work. However, you don’t have to do it alone.

The HomeOwnership Center’s Mortgage Ready program was created for the sole purpose of assisting those with bad credit, no credit, or past financial problems. In the program, you are given your own financial coach to educate, guide, and motivate you along the way. The entire goal of the program is to show you how to improve your finances so that you can buy a home of your own.

The bottom line? If you are unbanked due to past financial mistakes or if you have a bad credit history, there are steps that you can take that can lead you to homeownership.

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.



House Hunting Checklist

Why do you need a house hunting checklist?

The job of finding a new home can be confusing and even daunting. You have so many factors to consider and to remember. Does the house have the bedrooms we needed? Which house needed new kitchen appliances? Did the blue house have the bonus room over the garage or was it the house with the pool?

The Home Ownership Center of Greater Dayton created a checklist to help you keep track of the homes you visited and to assist you in evaluating each home. Hopefully, the list will help to organize your search and ease some of your house hunting stress. All you need to do is download the checklist and make as many copies as you need. Use one checklist for each home that you are evaluating.

Go ahead. Click on the thumbnail below and download the checklist. It’s free and it will make your house hunting experience a little less hectic.

House Hunting Checklist

House Hunting Checklist

Three Steps to Success for Buying a Home this Spring

Low mortgage rates are attracting homebuyers in large numbers. According to the Mortgage Bankers Association, applications in the first week of March for loans from families buying a home this spring were up 30 percent from the year before. Meanwhile, according to the National Association of Realtors, the number of homes for sale is lower than last year. In short, the competition is going to be intense, especially for homes within reach of first-time buyers.

The HomeOwnership Center has a few tips for homebuyers this season, that if followed will help smooth what is a complicated, and often frustrating process.

Step 1: Consult a Homeownership Advisor for Guidance and Advice.

You don’t want to search for a home unprepared. Knowing the numbers that matter when buying a home is extremely important to save time, frustration and lead to the best choice. More than two-thirds of consumers in a NeighborWorks America survey said that the home buying process is complicated. Demystify the process by consulting with one of the HomeOwnership Center’s housing advisors.

Our staff are certified professionals who can walk you through the different types of mortgages and interest rates; the effect credit scores have on being approved for a loan, how much down payment is needed for purchase, and how much home is really affordable to you.

Step 2: Build a Budget

Knowing your numbers is one thing, having the road-map to get you there is another. There’s no better tool to chart your course than with a budget. National surveys have shown that less than one-third of consumers have a budget. Going into this home buying season with a budget that includes potential changes in commuting costs after purchase, home maintenance expenses, and even estimates for changes in life circumstances such as becoming a parent or paying for college, will give you a leg-up on the competition and provide peace of mind.
Once all the numbers are on the table, it’s easier to see what type of home suits a family’s budget and needs, what might be necessary financial trade-offs, and what could be a direct line to trouble.

Step 3: Be Determined and Informed

Finding the right mortgage and the right home takes time, and it’s natural to want to shorten the process. However, making a winning bid on a home that isn’t right, and cutting corners to do so, could lead to trouble. For example, forgoing a home inspection to speed things up, or not fully understanding the terms of the mortgage are ingredients for problems down the road.

Following these three steps will help ensure homeownership success this season and for the long run.