Let's discuss the steps you should take to navigate successfully the maze you'll go through before the house warming party.
This article will deal primarily with what most new home buyers consider to be the biggest stumbling block: the down payment.
Oh, so you didn't realize that you've actually got to have some money to borrow some money? There are a few exceptions to that rule and we'll talk about that later.
Generally speaking, the best rates, points and availabilities are for mortgages (home loans) that are for 80 percent of the value of the property. So, 20 percent down is required. If you're looking at a $250,000 home, you'll need $50,000 down.
Interest rates are still at historically low rates, you have a good job and you have a good credit score. Your first step should be to find a reputable, knowledgeable realtor to help you walk through this huge financial undertaking. They have access to most of the homes for sale in the area, mortgage bankers, brokers, property insurance connections and closing companies to legally wrap the deal up.
However, it's going to be up to you to come up with the money. I've bought several homes during my life and never once did the realtors offer to make my down payment. So, where do you go -- how do you begin -- and from what sources will you draw? Let's take the obvious ones first and work down to the less obvious.
1) Cash -- if you fall in that category, you can stop reading and proceed to "Go" and get your deal done.
2) Mom and Dad/Grandma and Grandpa Loan Company -- If your parents/grandparents have the money to loan or give you, that's great! But, brainstorm this with your realtor. Your mortgage company will most likely impute interest, calculate payments and add this to your DTI (debt to income ratio). This may decrease the size of the loan you'll qualify for.
3) CD's (Certificates of Deposit) or life insurance cash values -- Both of these offer loans on your principal at around 2 percent and offer very liberal pay back options. But be sure to understand fully the consequences if you die or default while the loan is in place.
4) Military -- The VA provides no down payment, government insured loans for active and retired member of the armed forces.
5) Your 401k -- This is the most controversial of the options because it is like "borrowing from Peter to pay Paul" (ask your parents -- they'll explain). But, in this case both Peter and Paul should be making money for you. A home down payment is a legal way to borrow money from your retirement plan without having to pay penalties and taxes. So you've made a loan but you're paying yourself back with interest. This is not an early withdrawal, it's a loan!
6) ROTH IRA and traditional IRA -- Remember when you opened your IRA? One of the advantages is you can take a qualified withdrawal from your account, without penalties, if you're a first time homebuyer (no home ownership in past two years).
All of these options will require some planning, explanation and determination of what's best for you. Contact your favorite Certified Financial Planner to help you understand these options and formulate the best direction for you to take financially. Other professionals to contact will be your CPA to help you with the tax consequences for your home buying decision (most mortgage interest is tax deductible) as well as the actuary that provides the administrative over-sight for your company 401k.
Happy house hunting and welcome to the "American Dream".