There is an air of mystery surrounding real estate financing, and there shouldn't be. This process needs to be as transparent as possible, especially when there are so many misconceptions about requirements, and the process. Imagine a world where you could put less than 5% down on a property…...would you have enough cash to buy something then?
The 20% Requirement Myth
Let's discuss the 20% requirement for a down payment. As you can imagine, 20% down can be a lot of money, especially in the area surrounding Fairfield County, CT. For a $400,000 home, $80,000 tends to break the bank, and that is just the median price in Norwalk, with other surrounding towns having double, triple, or more of that median. The conversation then changes to, "What can I afford to rent?"
Rent or Buy, that is the question...and an unfortunate one at that. Renting is often times a necessity, given the state of your credit, your personal situation, or yes, your financial situation. But many times, buyers choose to rent instead of buy, because of the 20% myth. I am a firm believer that if you rent, and thus pay the mortgage of someone else, your money is going down the drain, never to be seen again.
Even more striking, is that you can probably pay FAR less in a mortgage than you would with a rent payment, especially with the competitive climate of rental properties in this NYC suburb.
What Are the Alternatives?
Since the 2007/2008 financial crisis that surrounded the financial sector, but was caused by faulty practices in the real estate world, banks and lenders have done what they can to reinvigorate the rate of home-ownership we saw prior to this time. This included things like the $8000 credit to first-time homebuyers in 2010/2011, and the reduction of interest rates to spur growth (by the Federal Reserve).
More recently, lenders have created Fannie and Freddie-backed products that have taken the huge down-payment requirements and minimized those in order to give more options to would-be homeowners. Fannie Mae recently introduced their Homeready program that is available to first-time home buyers with only a 3% down payment requirement. And that is where the 20% Requirement Myth goes to die.
As recently as last week, I have had buyers using the FHA program, which is a government program that insures your loan, while allowing you to put 3.5% down. The credit requirements are also a bit lower than the conventional loans of 20%. As with all loans under 20% down-payment, there is a requirement for an insurance premium that is attached to the loan, but paying this extra few hundred dollars destroys the idea of paying another person’s mortgage when you rent.
Going even further, an exciting, old program (but unknown) for first-time Connecticut home buyers is called CHFA (Connecticut Housing Finance Authority). The State of Connecticut sells tax free bonds and lends the money in low interest rate residential mortgages. I have had buyers use this program to put 0% down and finance the down payment in the process. This program has a host of Assistance and Voucher Program for all sorts of professions and situations – making it even more valuable for Teachers, Veterans, and those requiring Down payment Assistance (and more). CHFA is targeted to first-time homebuyers within certain income limits depending on the property’s location. In certain “targeted areas” buyers don’t have to be first timers or be within the income limits.
How Do I Learn More?
As you know, I am a Real Estate expert, not a mortgage financing expert. I have limited knowledge in this area, but enough to be of value. However, I have a team of experts around me that are ready to step in and help make this happen. In this case, you could ask a bank, and get left with a rough process resulting in frustration – or you can work with someone from a company that gives you some reassurance, that results in responsiveness.
That is where my go-to mortgage banker comes in – Ken Csehak. He works with a company called PHH Home Loans, and has done my mortgages, and worked with the majority of my clients. He is the person who educates me about these programs. To reach him, call him at 203.394.2688 or email him at Kenneth.Csehak@phhhomeloansne.com. Don't forget to mention me!
We (Joe and Chris Balestriere) are Realtors in Fairfield County, Connecticut. Our blog is meant to educate buyers and sellers and equip them with tools to get the most out of their Realtor, whether it is us or someone else. We focus on technology and how it enhances the work we do for our clients--we are not top CT Realtors by accident.