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Can I Qualify with limited savings?

Ways to augment your savings

Last time, we figured out how much money it would take to close on the purchase of a $250k home. But what can you do if your savings aren't that large? This time, we're going to discuss ways you can augment your savings to get to the closing table.

Let's consider the loan programs that require a down payment. For a conventional loan, our minimum down payment would be $7500 or 3% of the purchase price. For an FHA loan, it would be $8750 or 3.5%. No one involved in the transaction, the seller, the real estate agent, nor the lender, can contribute towards your down payment. However, you can use gift funds.

Gifts must be true gifts. They cannot have strings attached. The most common gift source is a close family relative. Purchasing a home from a family member at a below-market price, considered a gift of equity, also is an acceptable source. Some community organizations and government agencies are acceptable sources. For an FHA loan, your employer or labor union may provide gift funds. In all cases, we must verify the donor had the funds to give and that you have received them prior to closing.

We have more flexibility covering the $6600 in closing costs and pre-paid expenses. Certainly, we can use gift funds, as above. We also can use funds from the seller, subject to limitations. If you're using a minimum down payment conventional loan, the seller could provide up to 3% of the purchase price, or $7500, which would be more than we need. However, don't count on the seller covering your shortfall, especially in a tight market.

Your real estate agent also can contribute. The limit mentioned above applies to the sum of the agent's and seller's contributions. However, if the home buyer is a real estate agent, the agent can use the sales commission to cover these costs and, in some cases, also the down payment.

Another common way to cover closing costs and pre-paid expenses is to take a higher-than-market interest rate. A loan with a higher rate is more valuable to the market that buys and sells mortgage bonds. Your lender can use this extra value to help cover your costs. The market changes every day, but a quarter-point increase in your rate typically will generate a credit equal to 1% of your loan amount that can be applied against your costs.

Finally, if you qualify, you may be able to use a down payment assistance program to augment your funds. We'll dig into those next time.