With more than 6 million homes purchased in 2021, it's no surprise that many people have questions about what it takes financially to buy property in Arizona.
For most people, buying a home is one of the most significant financial transactions they'll ever make. It's also one of the most complicated. It's easy to get lost in the real estate process, especially when there are so many unknowns at each step along the way.
For example, it's difficult for someone to estimate how much their home would cost them after making an offer, taking out a loan, or deciding whether they want to use their 401(k) for their down payment.
Using a tool online will not answer how much you will need and how much your costs will be at closing. There are too many variables such as credit score, first-time homebuyers, and loan programs that will fit your financial needs and save you the most money per month. Luckily we work with professional loan and finance people that can answer all your questions upfront.
VA loans and down payments (No down payment required?)
VA loans are federal loans that allow veterans to borrow money for homes, college, or other purposes. They are beneficial for veterans who don't have much savings. When it comes to down payments on a home, VA loans can be a good option for those with fewer savings.
Veterans may be eligible for a low/no down payment VA loan if they meet specific criteria and have been honorably discharged from the military after at least 90 days of continuous service in the US Armed Forces. During wartime or peacetime with an honorable discharge.
VA loans are fantastic for past and present military, but it's not a one-size-fits-all. Other loan programs may be more cost-effective, especially if you have money to put down and good credit ratings.
We are seeing home buyers using VA loans come in with as low as 1% of the purchase price for closing costs (buyer used this to keep payments lower), and we have recently closed on homes with no money down at all with a VA loan. The buyer could get a check for the earnest cash they used when they made the offer.
So technically, most VA buyers will need an earnest money check. I would plan for around $2500 on an average-priced home, but we can sometimes make less earnest money work. And most times, with a VA loan, you can get that earnest money back after the home closes. If you don't have $2500, please don't let that deter you from purchasing a home.
How Much Down Payment to Put on a House?
The more you put down, the less you have to pay per month! Typically homebuyers moving up or moving from another location will use the sale proceeds for the down payment. Equity in homes has been helping people increase their home size/wealth for many decades.
The amount of money you need to buy a home in Arizona is dependent on how much you can put down. The percentage varies for different types of loans and your credit history. If you buy the home as an investment property vs. purchasing the house to live in, it will make a huge difference.
Whether you're buying the home to live in or invest in, many factors with your down payment and closing costs come into play.
The average FHA loan in the United States requires a 3.5% down payment and the average closings cost is approximately $3000.
Don't let this be a deterrent from trying to get a mortgage if you have less. Sellers can help with closing costs. Also, some loan programs like first-time homebuyer programs can take care of a lot of the down payment. They are wrapping some of the fees or down payment into the loan. So depending on your situation, I would talk to a loan professional to plan accordingly.
You have a separate professional for the mortgage process. There is an agent to help you find a home because of how many changes are happening in the mortgage market and the process. It would be nearly impossible for a real estate agent to keep up with the daily mortgage changes.
Some loans are here today and gone tomorrow. Mortgage loan originators are the matchmakers for loans and people. This is a full-time job in itself. Real estate professionals are helping you find the home and can't be your financial advisor or mortgage person unless qualified to do so.
Credit Score and How Does it Affect Your Down Payment?
Think of the down payment as your down payment on your mortgage in a sense. It lets you put in some money towards a house in advance so that the payment can be more affordable.
The credit score is one of the most important things to consider when buying a home. It determines the loan amount, interest rate, and how much you can afford to spend on your monthly mortgage payments.
Individuals with a good credit score can make down payments on homes that are larger than they can afford, making the monthly payment affordable. Conversely, individuals with bad credit scores don't have as many loans available to them or can't get loans for more expensive homes than they can afford.
Can I use My 401(k) for the down payment?
The down payment on a home is usually the single most significant investment that an individual will make in their lifetime. Due to rising property values, it is essential to understand your options for using your 401(k) savings for the down payment.
In most cases, with the guidance of your CPA, Financial Advisor, and depending on the policies of your current 401(K), you can use your 401(k) to pay for the down payment on a house. The rules allow you to borrow from your 401(k) to make a qualified home purchase.
The negatives of using the 401(k) can be if you are withdrawing the money, is the tax and potential early with drawl fees depending on your age. This is different if your 401(k) lends you money toward your down payment. This is why you should talk to a CPA before going this route.
Because you list your 401(k) as an asset in the loan approval process, make sure you tell your loan person you are planning on using your 401(K) for the down payment. They will probably have to look for loans that allow this.
What is the Best Down Payment Option for Me?
Down payment options are different depending on the type of property you buy, your financial situation, and where you live.
The best option you have discussed with your lender meets your personal financial goals and will help make sure you can afford the monthly payment even in unexpected life changes.
There are many different down payment options when borrowing money for a house, but ultimately it will come down to what is best for your specific situation and financial goals.
Make sure the home is affordable.
One of the most prominent American dreams is to own a home that's big enough for your family, and it's not too much of a stretch to imagine that this dream has been an aspiration for many people. However, the affordability of the American Dream is now in question due to recent changes in the market and rising home prices.
The Arizona housing market has changed drastically over the past decade as home prices continue to rise and interest rates reach record lows. Housing affordability is becoming less accessible as well as more expensive. This means that getting into an affordable mortgage now comes with conditions such as large down payments, high debt-to-income ratios, or exceeding financial comfort levels per month.
To budget how much mortgage payment you will need, you should look at the local market trends and your potential mortgage loan interest rate.
As a homebuyer, you should always have a budget in mind. This will help you stay within your monthly budget and avoid unnecessarily overspending on a home you cannot afford long term. When thinking of purchasing a home, it is crucial to understand the payment options of the house. There are many ways of paying for the home, such as a 20% down payment, low-interest rate mortgage, or principal and interest loan will be far less per month than a 3.5% low money down loan.
Before buying a house, it's essential to know all monthly costs, including mortgage payments, utilities, property taxes, and insurance. It is vital to find a home that you can afford and also makes you feel comfortable in. It is easy to go overboard in searching for the perfect home when you look online at expensive homes and spend too much money without considering your budget down the road.
Understanding your needs and sticking to them will ensure that you don't overspend on something that doesn't make sense for you. Leaving yourself plenty of room to make it through a market turndown.
If you are financing, you have to discuss your financial situation with your lender up front. I always recommend talking to a loan person before you rent or before you say no. Even if you don't think you can purchase a home, you would be surprised by the loans, grants, first-time homebuyer programs, first responder programs, USDA loans, VA loans, FHA loans, and other more creative loan programs available. You may be pleasantly surprised.
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