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Minimize the Cash You Need
It's difficult to save enough cash to buy a home. The most common reason stated by renters for not owning a home is lack of enough cash for down payment, closing costs, prepaids and reserves. However, there are many strategies to minimize the cash you need to buy a home. It is possible to buy with only the down payment and wrap closing costs and prepaid expenses into the transaction in various ways.
The first step to minimizing the cash needed to purchase is to get a good grasp on exactly what the costs will be. It is very helpful to obtain a Good Faith Estimate from a lender to verify these numbers. A lender will be happy to provide an estimate if you pre-qualify for a loan. Figure out how much money you would need if you were going to pay all the costs yourself, then you'll know what you have to cover.
The first place to start cutting your cash requirements is with the lender. Take a zero point interest rate. That means the lender charges you a slightly higher interest rate, but no discount points or origination fee. With today's low interest rate environment, a zero point loan is still a fairly low rate.
The second place to find cash is with the seller. It is easy to negotiate for the seller to pay your closing costs. The seller is interested in what they will net from the transaction. Let's say the house is on the market for $180,000. You think the seller would take $175,000. You need $3,000 to cover your closing costs and prepaid expenses. So, offer the seller $178,000 with a $3,000 credit toward your closing costs and prepaids. The seller nets his $175,000 and pays your costs.
Need to cover more? Let's look at that interest rate again. Let's say that today's rates are 7% with 2 points or 7.75% at zero points. Some lenders can offer an even higher rate and actually give you cash back toward your closing costs or prepaids. For instance, in the above scenario, you can get 7.75% for zero points, but if you will pay 8.75%, the lender will credit you with 1.75 points toward your costs. These types of loans are called "overpar" or "no closing cost loans". Even though you pay a higher interest rate, that interest is deductible and in today's interest rate environment, even an "overpar" rate is still low. The difference in your monthly payment will be very small, but the difference in cash needed is significant.