Buying a home is an exciting milestone that not only represents success and achievement but is also a setting where many memories will be made with family and friends. As you move forward toward an actual purchase, however, coming up with a down payment may feel daunting, if not impossible. For many homes, the average expected down payment can be 20% of the home price. For instance, 20% would translate to plunking down $100,000 cash for a $500,000 home. Plus, closing costs can add up to another $20,000 or more; interest rates are high; and inflation isn’t exactly low either.
Given the financial commitment that buying a home requires, you will want to have a plan in place as you balance other priorities like saving for your kids’ education. Fortunately, help is out there. Below, we’ve compiled a list of tips with some invaluable resources for planning and saving for a down payment—including a useful solution in the Wells Fargo Mobile® app that can help you start saving now for your future dream home to help you act fast when you find one that you love.
1. Prioritize Access and Growth for Down Payment Savings
Often, vessels with higher-growth potential (i.e., stock mutual funds, stock portfolios) require some lead time before you liquidate, or cash out. Conversely, accounts where your cash is easily accessible, like standard savings accounts, often don’t offer the highest of returns. So, you may want to save aggressively for the long term a few years or more before beginning your home search. Then, withdraw the funds you’ve earmarked for a down payment into a more liquid account when you officially kick off your search. You don’t want to lose out on a house in an ideal neighborhood because your funds aren’t easily accessible.
LifeSync® in the Wells Fargo Mobile® app can help you keep track as you work towards your personal financial goals, like buying a home, through content personalized for you. It helps you create a specific goal amount and track progress toward that goal, and it offers market commentary, timely insights, and contextual information.
2. Talk to Mortgage Brokers
Mortgage brokers are well-versed in interest rates, bank mortgage products, and the economic factors at play. They may be aware of programs that help first-time homebuyers through tax credits, reduced interest rates, and programs specifically tailored to students, former members of the military, senior citizens, and others. They also can help you figure out the down payment/mortgage loan ratios that may work best for you. An extra $50,000 down at a 7% interest rate equates to about $416/month. When you engage with a broker, they will want to do a credit check, but you can come prepared with other data about your personal finances through LifeSync® in the Wells Fargo Mobile® app.
3. Research Government Programs and Partnerships
Through your local or state government, you may have access to down payment assistance programs in which nonprofit organizations or the city itself partner with banks who see the borrowers—especially first-time homebuyers—as possible new clients.
Often, state and local governments have their own programs. Vermont, for example, offers a Down Payment Assistance (DPA) program in which the state provides assistance through a non-amortizing, 0% second mortgage (for which the borrower does not have to pay the principal owed until the loan is due). New York City offers the HomeFirst Down Payment Assistance Program, which offers qualifying homebuyers up to $100,000 toward the down payment or closing costs. Begin researching programs like these through your city or town’s local lenders and your state housing commission.
4. Look Into Your Employer Benefits
Often employers, including hospitals and universities, offer financial assistance that may be forgiven over a number of years or offered as a gift outright. According to Fannie Mae, these can come in the form of a grant; a direct, fully repayable second mortgage or unsecured loan; a forgivable second mortgage or unsecured loan; or a deferred-payment second mortgage or unsecured loan (“deferred-payment” meaning you do have to pay it back, but you can do so at a specified later time). Funds generally must come directly from the employer.
It’s worth checking to see if your employer offers Fannie Mae’s Employer Assisted Housing (EAH) down payment assistance program, as the loan is forgiven 20% per year for five years, with no principal or interest payments required from the employee as long as you remain with the company. This means you effectively pay off the loan just by staying at your current company.
5. Understand Affordability and Budgeting
Regardless of these affordability programs, keep in mind what is affordable for you. Experts estimate that your monthly house payment (including principal, interest, taxes, and home insurance) should not exceed 28% of your gross monthly income. So, look at what you make per month before taxes, multiply it by 0.28, and that’s the maximum you should look to spend on this important investment.
Buying a home is a significant financial commitment that requires careful planning and saving. By prioritizing your savings strategy, exploring mortgage options, researching government and employer programs, and understanding your budget, you can make the dream of homeownership a reality. Utilize tools like the Wells Fargo Mobile® app to stay on track with your financial goals and make informed decisions along the way.
Securing a large loan can be challenging, even for financially stable individuals. However, one viable option is using land as collateral, much like a home equity loan. Instead of borrowing against the equity in your home, you borrow against the equity in your land. Here’s a detailed look at land collateral loans and how they can work for you.
Land collateral loans are secured loans where your property guarantees the loan. If you fail to repay the loan, the lender can seize the property to cover the remaining balance. This added security often makes lenders more willing to approve these loans, potentially offering lower interest rates and higher borrowing limits compared to unsecured loans, which rely solely on the borrower’s income and credit history.
“One of the benefits of using land as collateral for a loan is that it allows you to take out a loan without risking assets such as your home, car, savings, or stocks,” says John Sport, vice president of First South Farm Credit. “In some situations, the collateral (land) can be used in lieu of a down payment, allowing the borrower to hold onto their cash.”
To secure a loan using your land as collateral, the lender must first approve you and determine that the land’s equity value meets or exceeds the loan amount. After approval, a lien is placed on the land, which will be released once the loan is fully repaid.
The first step in using land as collateral is determining its value. A rural land real estate appraiser typically assesses the land, considering factors such as location, condition, timber quality, and infrastructure. Additionally, the land must be free of any debt restrictions and available to be pledged as collateral.
“The value of the land is best determined by a rural land real estate appraiser,” Sport explains. “Once these initial concerns are addressed, the borrower and lender can discuss the structure of the loan that works for both parties.”
Land equity loans are versatile and can be used for various purposes, including:
– Acquiring Additional Land: Many landowners use equity in their land to purchase more rural land.
– Land Improvements: This includes building ponds, barns, or other structures to enhance the property.
– Construction Loans: You can use land as collateral for construction loans to build or improve a home on the property. This can reduce or eliminate the down payment required for such loans.
“Those who are ready to improve or construct a home on their rural home sites can use land as collateral for an improvement/construction loan,” says Brandon Simpson, loan officer for First South Farm Credit.
Using land as collateral for personal loans varies depending on the lender and the loan’s purpose. If the loan is for debt consolidation unrelated to rural land or farming operations, a Farm Credit lender may not accommodate the request. It’s best to discuss all details with a loan officer to determine eligibility.
“Farm Credit is tied to rural agricultural lending for full and part-time farmers as well as rural landowners,” Simpson notes.
The most common use of land as collateral is to purchase more land. “If you don’t want to use cash for a down payment, you can pledge the land you own to reduce or eliminate your down payment,” Simpson adds. However, using land as collateral ties up the asset for the loan’s duration, and the lender can take possession if the loan terms are not met.
Advantages and Disadvantages of Land Collateral Loans
Advantages:
– Secured Financing: The land provides sufficient collateral, potentially offering favorable loan terms and freeing up cash for the borrower.
– Lower Risk to Other Assets: Allows you to take out a loan without risking other assets like your home or car.
– Flexible Use: Can be used for various purposes, including land acquisition, improvements, and construction.
Disadvantages:
– Asset Tied Up: The land is tied up as collateral for the loan’s duration.
– Foreclosure Risk: The lender can seize the land if loan terms are not met.
Key Questions to Ask Lenders
Before proceeding with a land collateral loan, ask your loan officer these questions:
– Can I use my land as collateral for a specific type of loan?
– What is involved in using my land as collateral?
– Do I need an appraisal?
– Are there any fees involved?
– How does using land as collateral impact my payments and loan terms?
Is a Land Equity Loan Right for You?
Deciding whether a land equity loan is right for you is a personal decision. Generally, if using land as collateral can reduce your payments and offer favorable loan terms, it’s a good option to consider. However, fully understand the risks and implications of using your land as equity for an additional loan.
“In some situations, using land as collateral for a loan can reduce your payments and provide other favorable loan terms,” Sport says. “But the borrower needs to fully understand the risk and implications of using their existing land as equity for an additional loan.”
By understanding land collateral loans and carefully considering your options, you can make an informed decision that aligns with your financial goals and needs.
If there’s an upside to inflation, it might be the energy improvement tax incentives introduced by the Inflation Reduction Act of 2022. These tax credits offer homeowners substantial savings for making specified home energy efficiency improvements.
Why Consider Energy Improvement Tax Credits?
High utility bills can be a significant burden for homeowners trying to maintain and improve their properties. Fortunately, the new energy efficiency tax credits can help offset these costs, providing financial relief and encouraging energy-saving practices.
“There have been a number of tax incentives for energy in the past decades, and they’ve been very helpful,” says Evan Liddiard, CPA, director of federal taxation, federal policy, and industry relations with the National Association of REALTORS® in Washington, D.C. “But these new ones leave them in the dust because there are more incentives and more money on the table. Earlier laws had lifetime limits. Once a taxpayer had credits up to that limit, they couldn’t claim more. But these new rules have no lifetime limits in some of the categories. However, there are some year-to-year limits.”
Two Types of Tax Credits
The tax credits are divided into two types: the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit, explains Courtney Klosterman, home insights expert at Hippo Home Insurance Group.
Energy Efficient Home Improvement Credit
This tax credit is available to homeowners making qualified energy-efficient improvements to their homes, such as:
– ENERGY STAR’s most efficient products can earn owners credits up to $600 per year.
– Homeowners can claim up to 30% of what they spend, each year up to 2032.
– These must have thermal efficiency ratings of at least 75%, qualifying for up to a $2,000 credit per year.
Homeowners can also request home energy audits from professional auditors for tax credits of up to $150 per year. These audits can identify areas of energy loss and potential home health and safety issues, potentially saving homeowners up to 30% on their energy bills by making recommended improvements, according to the U.S. Department of Energy.
Residential Clean Energy Credit
This credit supports homeowners investing in renewable energy solutions, including:
– **Solar, wind, geothermal, and fuel cells**
– **Battery storage technology**
“This credit intentionally covers improvements that aren’t common yet,” says Liddiard. “Congress took the time to really look forward to what could be widely available in the next decade.”
Homeowners can claim 30% of the cost of these improvements until 2032, after which the reimbursement drops to 26% in 2033 and 22% in 2034. If all upgrades are done in one year, unused credits can be carried forward to future years, a flexibility not available with the Energy Efficient Home Improvement Credit.
Planning for Maximum Benefits
Proper planning is essential for maximizing these credits. DR Richardson, cofounder of Elephant Energy, advises homeowners to strategically plan their energy efficiency projects. “You want to install the heat pump one year and the heat pump water heater the next year to maximize those credits.”
When claiming the Energy Efficient Home Improvement Credit for improvements made during 2023, homeowners need to file Form 5695, Residential Energy Credits Part II, with their tax returns. The credit must be claimed for the tax year in which the installation was made, not the year of purchase.
Avoid Common Mistakes
Avoid installing equipment that isn’t efficient enough to qualify for the tax credits. Working with a knowledgeable contractor can ensure you select qualifying products. “The federal government doesn’t make it perfectly clear to the average consumer which products are sufficiently efficient,” Richardson warns. “So, you want to work with a contractor. Most buyers are not buying from the store, and the average salesperson would not necessarily know.”
Newer Homes Can Benefit Too
Liddiard shares his personal experience with energy efficiency improvements in his 11-year-old home. “It’s remarkable how much improvement has gone into furnaces in just 10 years,” he observes. “Your home does not have to be 40 years old for you to reap significant benefits and tax credits from energy-efficient home improvements you undertake.”
Homeowners looking to save money and enhance their home’s energy efficiency should consider taking advantage of these new tax incentives. By making strategic improvements and leveraging available credits, you can reduce energy costs and increase the overall value and comfort of your home.
