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Springtime Home Buying Guide

Springtime is home buying season. Families prefer to move during a vacation to avoid disrupting school years, and nobody wants to shop for houses or move during a snowstorm! Both supply and demand pick up as the weather warms up, and as the market heats up, you’ll need to stay alert and be smart to grab the best deals.

"Fed rates are low!" exclaim ads on the radio and the internet. Mortgage companies are urging people to buy now or refinance existing mortgages before rates increase. Spring weather is making an occasional appearance, and the housing market gets its annual resurgence of housing inventory. Is it time to make the plunge into the housing market? There are many things to consider when purchasing a new house. Mortgage lenders, mortgage assistance programs, the housing market, interest rates, and housing inventory and competition are all in the picture, and the more you understand them, the better your decisions will be.

Interest rates are slowly increasing. The average interest rate on a fixed rate loan in December 2016 was between 4-4.08%, up from the summer low of 3.6% in August.[1] In historical terms, this is still a low rate. Before January 20, 2017, US Department of Housing and Urban Development (HUD) was set to lower the mortgage insurance annual premiums, but the Trump administration has taken this off the table. Interest rates are still low, but slowly on the rise since last August. The bottom line on interest rates: they are still low, but creeping up, suggesting that this might be a good time to get off the fence and make a move.

Springtime brings in more inventory as people think about moving or upgrading their residences. Moving in the summer is far more appealing than a winter move, especially if there are school changes involved or harsh and unpredictable weather. More people are also looking for houses, and that drives up the competition. Some high-demand markets regularly see houses sell for $10,000-20,000 and more over the asking price as potential owners get into bidding wars and try to offer the sweetest deal possible.

The first step is to be pre-approved with a mortgage lender. The lender can recommend different loan programs to fit your income needs. There are also government incentives supporting purchasing in different areas and programs that help down payments.

A good place to start is the HUD website. It has a "buying a home" section that gives a good launching point to find information on government programs, interest rates, laws that protect buyers, and more.[2]

Mortgage Programs
FHA Loans
FHA loans are mortgages insured by the Federal Housing Administration, which offer attractive debt ratio requirements and low down payments. Borrowers pay mortgage insurance that protects the lender from a loss if the borrower defaults. Borrowers can get an FHA loan with 3.5% down and a credit score of 580 and higher. You have to pay the down payment, though you are permitted to use gifts from family or grants from local government programs. The lender must be FHA approved, and the House needs to pass an FHA inspection. There is also possible FHA 203(K) loans that provide cash for necessary repairs.[3]

VA Loans
While FHA loans are popular, other mortgage programs provide significant incentives but are not as well known. If you are a veteran, the VA mortgage should be your first stop. These loans feature $0 down payments, no mortgage insurance, and lenient debt ratio and credit score requirements. Veterans qualify with:

90 days of service during wartime (if currently on active duty)

181 days of service during peacetime

24 months or full period for which you were ordered (if you are now separated from service)

Six years if you were in the National Guard or Reserves[4]

USDA Loans
USDA offers two types of loans. The USDA Rural Development Loan or USDA Guaranteed Loan offers $0 down payments in designated rural areas (although some regions are suburban.)

USDA Direct Loans, or Section 502 Loans, can be stretched across a 33- to a 38-year term. You must apply for these loans directly through USDA. Loan recipients cannot qualify for the Rural Development Loan and earn 50-80% of an area's median income.[5]

HomeReady 3% Down Mortgage
HomeReady is a Fannie Mae program that offers first-time buyers a loan with only 3% down and the opportunity to earn up to 3% of the purchase price back in closing cost assistance on Fannie Mae HomePath-owned properties. You'll have to complete a buyer education course (the course fee is reimbursed during the closing) and find a realtor. Income from family members who are not signatories on the loan can still help you qualify for loans. Boarder and roommate income also counts toward qualification.[6]

Good Neighbor Next Door
This program, for law enforcement, teachers, and emergency personnel, allows them to purchase houses at 50% of the cost and a $100 down payment. However, only certain states in revitalized areas participate.[7]

Down Payment Assistance Programs
There are support options available to low-income buyers. State, county, and local governments and non-profit agencies offer different programs that help first-time buyers (and sometimes repeat customers) in the form of down payment assistance. These programs help low-to-moderate-income households purchase residences and become permanent participants in a neighborhood. Buyers typically need to complete homeownership education courses as part of the program.[8]

In California, National Homebuyers Fund offers Down Payment Assistance (DPA) that helps with down payment, and closing costs up to 5% of the loan amount. Since it is a grant, DPA does not need to be repaid.[9]

Homeownership Fairs are an excellent way to find out about local resources available to new buyers. Often vendors are invested in the housing cause and offer workshops on everything from finding a realtor, talking mortgages, finding down payment assistance, even repairs and weatherization.

The best way to participate in down payment assistance programs is to contact your local city, county, or state governments who can direct you to local agencies that manage these programs.

Rent-to-Own options
Rent-to-own or lease-option agreements are worked out between a renter/buyer and the house seller. Both parties have risks and advantages in this option. Rent-to-own plans are a savings program for the customer who does not have enough cash on hand for a down payment. After negotiating the price, you pay an upfront option fee that later goes towards the down payment. Then each month, you pay the agreed upon rent and a monthly rent credit. The rent credit goes towards the down payment. Rent-to-own options are usually contracts for three years. The seller agrees to sell, and you take care of the property and "try out" the house and the neighborhood. At the end of the rent-to-own contract, you can either purchase the property or walk away, though if you walk away, you lose the option fee and the rent credit.

Pros: You're locked into a house price that could increase in value (but the price is set). You can "try out" a home without a full commitment.

Cons: if you are late on rent by a day, you could lose the rent credit for the month. If the owner goes into foreclosure, you can lose the house and be evicted.

This option does require a lender who is willing to grant a mortgage on a rent-to-own property. An appraisal determines fair market rent.[10]

A home is an exciting purchase. It could be the biggest single purchase of your life. The most important things to keep in mind are to research your options, review your finances and credit score, and find trusted sources of information. Spring is a great time to begin the housing search so that you might find your new home and be moved in by summer!