How to Have a Seller Pay Your Closing Cost While Using a First Time Home Buyer Mortgage Program to Cover Your Down Payment
Being a first time home buyer can certainly be a confusing situation. If you do not work with a Realtor and loan officer that know the business well, the complexities of buying a home can whirlwind out of control. As a first time buyer using first time home buyer mortgage options, these situations must be handled even more delicately. This article will focus on how to get the seller to pay the closing costs associated with the purchase of a home, and how to utilize local state or county first time home buyer grant/assistance programs to cover your required down payment needed to purchase a home.
STEP ONE - LINE UP YOUR FIRST TIME BUYER PROGRAM
Meet with a loan officerto be pre-approved for a first time home buyer mortgage and to confirm the amount of concessions you will need (or, how much you need the seller to pay for you). These options and figures can vary greatly based on the location of the home, the loan programs available, credit profile, the home's taxes, and more. It is vital that you find a loan officer that has a working knowledge of all of the local first time home buyer programs.
It is not uncommon for a loan officer to give inaccurate advice based off of his/her specific bank's limited options. The fact is that most lenders do not offer local first time home buyer financing. Many lenders simply state that, for instance, FHA or USDA loans are first time buyer programs. This is inaccurate, and indeed this can keep some people out of the home buying "game". To complicate matters, even if you find a lender that offers one of this programs, their loan officer(s) may have never worked with this type of program.
So to reiterate, find a local, experienced "first time home buyer" loan officer, and don't be afraid to ASK MANY, MANY QUESTIONS. Any reputable loan officer will be happy to answer all of your questions.
Some first time buyer grant/assistance programs are tied to the actual mortgage - they are a one-in-all financing scenario. Other grant/assistance programs are completely separate from the mortgage approval process. Depending on where you are looking to by, some of these programs may overlap. You may prefer one program above another, or sometimes even use more than one at the same time. Again, another reason to work with a loan officer experienced in helping first time buyers with these types of financing.
STEP TWO - DETERMINE CONCESSIONS
Once the first time home buyer grant/assistance program is determined, the lender can then calculate the amount of seller concessions you will need (the amount the seller will need to pay for you). Let's look at the following example to determine how a lender would determine this.
For our example, we will use the SMART START program currently offered in New Jersey (to participating lenders). With the NJ Smart Start program, a buyer can obtain assistance of up to 4% of the loan amount. In most cases, the buyer will select an FHA mortgage which requires a 3.5% down payment. (in this case, the mortgage is approved together with the assistance program).
Let's break this down:
Home buyer purchases a home for $200,000
FHA down payment requirement is 3.5%, or $7,000
The loan amount after the 3.5% down payment required would be $193,000
The assistance program, in this case, would be 4% of the loan amount, or $7,720
We find that the assistance of $7,720 covers the required down payment of $7,000
The left over assistance money ($720) would be used towards the buyer's closing costs.
Let us assume the buyer's closing costs plus prepaid items come to $6,000
To find out how much you need the seller to pay, you would take $6,000, subtract the positive credit from the assistance program ($720), and that is the amount the buyer would need to request for the seller to pay = $5,280
STEP THREE - START MAKING OFFERS
Meet with a Realtor to discuss your pre-approval and your objectives. Even though many Realtor's are familiar with seller concessions, many are not familiar with home buyer programs such as those mentioned above. To be ultimately successful you will want your loan officer and your Realtor to speak in detail about your specific loan approval and financing terms. As a buyer, do not assume all parties are on the same page. As a buyer, your involvement, even as a first time buyer, is very valuable.
Some Realtors will be priceless when making offers and negotiating for a buyer. Some will have a tendency to make offers based on the pre-approval amount only, not paying attention to the seller concessions desired (or required). Some agents may request the maximum amount of seller concessions allowed with FHA, which is 6%, but this is rarely needed. If not structured correctly, the buyer will potentially lose out on the excess concessions they don't use, meaning that they over pay for the home.
Maybe it goes without saying, but you "Get what you pay for" when you choose a professional to work with. Except in this case, you may pay much more (for a house) and get much less (from the seller). Ask as many questions as possible. It will help you find the right person(s) to work with.