How to buy a home without cash from your parents
Savings, down-payment assistance and other options can aid first-time buyers when the Bank of Mom and Dad runs dry.
© James Lauritz/Getty Images
Many first-time homebuyers traditionally have relied on parents and grandparents to help with a down payment and closing costs. But today, many older people aren't in a financial position to offer this assistance to younger family members.
How can would-be buyers afford their first house or condominium on their own? For many buyers, the answer involves a combination of personal savings, a low-down-payment loan with mortgage insurance, seller-paid closing costs or a first-time homebuyer down-payment assistance program. (Bing: Is there a down-payment assistance program in your area?)
Stock and savings
Dan Nainan, a comedian and voice-over actor in New York, used cashed-in corporate stock options and personal savings to buy a 750-square-foot co-op apartment in Manhattan this year.
About half of his $85,000 down payment and closing costs came from stock options he sold five years ago. The rest came from a lifestyle that he says includes a lot of library books and dining-out coupons, but no cars, cocktail hours or cable television.
"It's important to live well but also watch your expenses," he says. "It's possible to do both."
Nainan, 29, says he never expected homebuying help from his parents. Although the prospect of buying a home was "somewhat daunting," he says he still felt confident he could achieve his goal.
- MSN Money: Still living at home: How long is too long?
"I had to pay for my own college by myself, and I had to pay for my first car," he says. "A lot of my friends, their car was paid for, their college was paid for and their home was paid for. But my dad has always stressed for my sister and myself to do things independently."
Down payment help
Homebuyers who aren't in a position to save tens of thousands of dollars typically turn to loan programs that allow a small down payment, relative to the home's purchase price.
A loan insured by the Federal Housing Administration, known as an FHA loan, requires a down payment of only 3.5% for eligible borrowers. Granted, 3.5% isn't nothing, but it's a relatively modest amount compared with the property's value and can be affordable in a low-cost housing market. All FHA loans involve extra costs for mortgage insurance, which protects the lender if the borrower defaults on the loan.
Article continues below
Private mortgage insurance, or PMI, also allows buyers to buy a home with a small down payment. Today, a loan with PMI might even be cheaper than an FHA loan, says Jay Dacey, a mortgage broker at Metropolitan Financial Mortgage Co. in Minneapolis. PMI can be paid monthly or wrapped into a higher interest rate.
PMI also can be financed as part of the loan amount. Dacey cites a hypothetical example of a $4,000 premium added to the loan.
"Say you borrowed $200,000," Dacey says. "That extra $4,000 (for PMI) will wind up on the loan side, so that's $204,000. That's why it's called a 'single-financed.' And then, you never have to pay a monthly mortgage-insurance premium."
First-time homebuyer down-payment programs, which local and state housing agencies offer, extend grants and loans to first-time homebuyers who meet certain guidelines.
- On our blog, 'Listed': Asking prices for homes finally falling?
Greg Cook, a loan consultant at Guild Mortgage Co. in Temecula, Calif., says he is a fan of the programs in his area. Dacey is less enthusiastic, saying that these programs tend to have strings attached, such as income restrictions and payback requirements.
Buyers and sellers traditionally share the closing costs of a home sale. But sometimes a seller will pick up most or all of the buyer's costs as part of the deal. For example, a bank that owns a property outright because of a foreclosure or agrees to take a loss on the seller's mortgage in a short sale often will pay the buyer's closing costs, Cook says.
- Bing: What are closing costs?
Still, buyers typically need some money of their own.
"If nothing else," Cook says, "they have to have enough to write the earnest money check."
That initial deposit can be several thousand dollars, depending on the home's price.
First-time buyer tips
Regardless of whether mom and dad contribute, prospective buyers should meet with a lender upfront to find out how much they can borrow. Buyers also should clean up any errors on their credit report and try to build up emergency savings, in addition to their down payment and closing-cost funds, loan officers say.
"It's not a bad thing to have too much money at closing," Cook says.
Nainan says buyers should learn about credit scores, pay off their credit-card bills every month and use online budgeting services to track expenses and increase savings.
"I can't think of anything that's more worth saving for than buying a home," he says.
my parents always worked full time jobs, even when my sister and i were children. we always had family member watch us-not child care-, and although our parents were always working, they were still very poor. sometimes in the house, we would have only water and crackers and cheese for days on end.
needles to say, after some years they became alcoholics and lost their home. they never paid for our housing or cell phone, but did buy me a used car once for 1500$, the only money they had left after taxes. ive always paid my own car insurance, cell phone, bills, food and have always rented my houses or apartments from my own income.
i notice, now that i am in my late 20's, that most kids my age have everything paid by their parents still. they dont know how to survive on their own. my other colleagues either have jobs cos of their parents company, have had the same job for the last 7 years, or are back to living at home.
now, i can add that i am unemployed and work construction and freelance work such as caretaking, or teaching. after the economy's collapse, my partner and i moved into a tent in a family members backyard, and saved our money by working a full time job + freelance work. the only thing i wish i hadn't done, was to go back to school for my MFA studies, as I took out a loan to help with finances, once my partner and I were laid off from work. But it helped us to rent out an apartment for a few years. Yet now, we still do not have promising work and are NOT considering buying a Home, because it seems pointless. mommy and daddy taught us alot, by not spoon feeding us but allowing us to do it on our own, because it was the only choice we had.
Lived in a cheap mobile home on a rented lot until I saved the money to buy a lot in a not to high class area (not low class either). Served as my own contractor - hired subs to put in footing -foundation - and most of the outside work. Installed my own plumbing and wiring. Hired sheetrock installed and finished - painted myself - lived for years without carpet or inside doors until I could afford them. Didn't buy a lot of expensive furniture. It was interesting that my neighbor hired a licensed electrical contractor to wire his house - it burned a few years later due to an electrical short in the wiring. My electrical work is now over thirty years old and no problems at all.
Retired and sold the fully paid for house - for a huge profit - the total price didn't compare with what others got for their homes in "high class" neighborhoods - but a lot of money for what I had in the house.
Didn't borrow money from my parents or grandparents. Did get a fixed rate loan for the materials from an independent - not a bank.
Sadly - far too many people have overly high expectations in home quality. You can build a perfectly nice, livable home with less expensive materials.
I have a big agreement with some of the comments here that the term "homeowner" needs to be taken w/ a grain of salt, unless you are paying way more than a basic down paymen up front.
First there is pre-qualifying, where you show your ability to handle the loan, right? Not so fast... once you commit, you come right back around and provide ten times the original "proof" all over again after an offer. Then you do it once again just before closing to prove your situation hasn't changed. Aside from the proof of financial ability, you are required to have a certain level of insurance so if catastrophe strikes, the bank doesn't lose anything. If you don't have a VA loan and/or your down payment is low, you have a very hefty mortgage insurance, so once again, if you bail the bank doesn't lose. You then add your taxes to the loan amount, so the bank is not risking you not paying your taxes. Every player in the transaction adds their little fee, so that by the time you are finished, for the first for the first several years of a loan, very little of your payment ever goes to the principal so that you actually own a part of your property.
The property likely has easements so utility companies can come and go at will. Depending on where you live, there will very possibly be covenants w/homeowner's associations and community zoning regulations that control what you can do to the property, along with requirements that you do various things to keep up the property.
I move around a lot as part of my profession, buy wherever I end up living for more than a few years, but I don't have a lot of delusions that my castle is really mine. Really, if I have bought wisely, it is a place to relax and grow a garden, concurrently trying to wisely place some more bucks here and there so that when it is time to move again, I walk away with a few more dollars than when I started.
I think the biggest problem when 'buying' a first-time home is the title, "Home Ownership". Really, did you pay cash for it...then let's call it what it is, "Home Loanership". People need to realize that until they make that final payment, there is always the chance, especially in today's economic environment, to lose the house...hell, even if you pay it off and stop paying property taxes watch out for those liens.
Also, to the suggestion of rolling your PMI into the loan and never having to pay for it ranks as one of the dumbest suggestions of all time.
Instead of worrying about how to afford a house, people should come to the realization that owning a house is not only completely unnecessary in modern society, it can often be more of a burden than a boon. Consider your options and choose wisely before diving into something that can potentially turn into an anchor.
I think the boomer generation are going to run into a situation where there are more houses than families who want to, or can afford to, buy. The "American Dream" is no longer to own a house and start a family, but rather to buy a house and sell it to somebody else for a profit....which ruins it for everybody else.