If you’re considering buying a home with an Accessory Dwelling Unit (ADU) or a property with ADU potential, or even adding one to your existing property, this is the article for you. Many Gen Z and millennial homebuyers are loving the idea of an Accessory Dwelling Unit to offset their mortgage with rental income through house-hacking. Other people may be interested in ADUs to gain extra living space for family, or with so many American’s working from home, added office space! There are tons of benefits to an Accessory Dwelling Unit and we’ll consider those and how you might go about owning one in this article.

What is an ADU?

ADUs are smaller secondary residential units on a single-family property. They typically feature a separate kitchen, bathroom, and entrance from the main house.

Types of Accessory Dwelling Units:

Apartment over garage
Garage conversion
Mother-in-law quarters
Backyard cottage
Granny flat
Prefab detached unit (Tiny home)

Who’s Building and Buying ADUs?

In today’s low-inventory housing market, ADUs are a great option for many people. Here are some reasons people build or buy properties with ADUs:

- Expand living space: Create more space for family or extended family. Maybe a parent can live nearby with some privacy, or a grown child can return home without feeling cramped.

- Downsize living: Move to a smaller space while staying on your property.

- Home office or studio: Have a dedicated workspace conveniently located at home.

- Offset mortgage or generate rental income: Some homeowners live in the main house and rent out the ADU to help pay the mortgage. Others choose to live in the ADU and rent out the main house.

Why are ADUs so Popular?

Making the Most of an ADU

ADUs are versatile spaces that can serve various purposes depending on your goals. Consider if you want more internal space (like a basement conversion) or more yard space. Do you aim for rental income? Maybe you want to downsize and live in the ADU while renting the main house?

- Multigenerational Living: Many homeowners build ADUs for aging parents or adult children who need a place to live. ADUs offer privacy and independence while keeping loved ones close.

- Rental Opportunities: With high housing demand, building an ADU for real estate investment can provide a steady income stream. Whether you choose long-term tenants or short-term vacation rentals, an ADU can help offset your mortgage or provide extra cash flow.

- Short-Term Rentals and Airbnb: Especially in tourist areas, short-term rentals are a popular option for ADU owners. Listing your ADU on platforms like Airbnb allows you to tap into a growing market for unique accommodations. Short-term rentals offer flexibility and potentially higher rental rates during peak seasons. However, be sure to check local regulations and HOA rules regarding short-term rentals before pursuing this option.

- Home Office or Workspace: If you work from home or need a dedicated space for hobbies, an ADU can be the perfect solution. Design the space to meet your specific needs and enjoy a separate area to focus on work or passions.

- Guest Accommodations: An ADU can also function as a comfortable and private space for guests. Whether you have out-of-town friends or family visiting or want to offer a unique Airbnb experience, an ADU provides a welcoming place for guests to stay.

Does an ADU Add Value to Your Home?

Home improvement projects like kitchen updates, bathroom additions, and energy-efficient windows can increase your home’s value. Building an ADU is another great way to add value.

ADUs can be profitable in smaller cities and towns as well as urban areas, but provide another great benefit of affordable housing in places where it is highly sought after. A study from Porch showed that in large cities, properties with ADUs typically sell for 35% more than similar homes without them.

Increased Property Value and Rental Income Potential

- Property Value: Constructing an ADU on your property typically increases the resale value of the property. An appraiser will consider the value of other homes with ADUs when appraising yours. Properties with ADUs often sell for a premium because they offer an income-producing unit and more total living space.

- Rental Income: In addition to the added value of increased property value, ADUs can provide a steady stream of rental income, helping offset mortgage payments or providing extra cash flow. They can also offer more privacy than simply renting out a room in your main house.

Are There Downsides to an ADU?

There can be a few drawbacks to consider depending on the type of ADU you have, how you use it, and your expectations going in:

- Space Limitations: ADUs are inherently smaller spaces, which may not be ideal for everyone.

- Construction Costs: Building an ADU can be expensive, especially if it includes a kitchen, bathroom, and separate entrance.

- Building and Zoning Regulations: There are zoning regulations and permitting processes to navigate when building an ADU.

- Privacy Concerns: Depending on the layout of your property and ADU, there may be some privacy considerations for both you and your tenants.

- Maintenance and Upkeep: Like any additional structure, an ADU requires maintenance and upkeep.

Does Adding an Accessory Dwelling Unit Increase Property Taxes?

Adding an ADU may increase your property taxes because it increases the value of your property. It’s recommended to reach out to your county assessor’s office beforehand to determine the potential tax impact. Consulting with an accountant or tax advisor can also be beneficial to discuss your specific situation.

Can an ADU Have a Separate Address?

Whether or not an ADU can have a separate address depends on your location. Here are some possibilities:

- Half address or unit designation: Some homeowners use a ½ address or add “Unit B” or “Unit 2” to the existing main address.

- Assigned address during permitting: In some states, an ADU is assigned an address during the building permitting process.

- No separate address: In other states, the ADU may not be assigned a separate address.

ADU Zoning, Rules, and Regulations

Importance of Early Planning

Thinking about building an ADU requires early preparation for a smooth process. Zoning regulations and legal requirements are in place to ensure these projects align with the community’s planning goals. Cities and counties have varying approaches to ADUs; Some actively encourage them for more housing options, while others have restrictions to protect existing neighborhoods. Understanding the specific rules in your desired location is crucial. Don’t assume what’s allowed elsewhere applies to your area!

- Contact your local planning department. They are the ultimate authority on what you can and cannot build. Proactive research pays off. Before investing in design plans, consult the planning department to understand restrictions like minimum lot size, height limitations, allowable square footage, and any parking requirements. Some cities even have pre-approved ADU designs to streamline the process!

- Partner with experienced professionals. Architects and builders well-versed in ADU construction are invaluable. They understand the nuances of the permitting process and can translate zoning code legalese into practical advice for your project. Their knowledge of local regulations can even help you explore creative design solutions that maximize your project’s potential while remaining fully compliant.

Working with Professionals: Contractors and Designers

To ensure your ADU meets all requirements and integrates seamlessly with your property, working with experienced contractors and designers specializing in ADU construction is essential. Here are some qualities to look for in professionals:

Licensed and insured
Experience building ADUs
Provide references and examples of their work
Understand local zoning laws and permitting requirements

Which Loan Types Allow for ADUs?

Financing an Accessory Dwelling Unit can vary depending on how you plan to use it. If you intend to use rental income from the ADU to offset your mortgage or qualify for a larger loan, many loan types will allow for current or projected rental income to be taken into consideration, while others don’t.

Loans That Allow Rental Income from ADUs

- Conventional Loans: A conventional loan is any mortgage loan that is not insured or guaranteed by the government (such as under Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or US Department of Agriculture (USDA) loan programs).

- FHA Loans: The Federal Housing Administration (FHA) now allows homebuyers to use projected rental income from ADUs to qualify for mortgages on new construction, homes with existing ADUs, or renovations that include ADUs. Learn more about the new FHA financing policies as of 2023.

- VA Loans: VA loans are offered by the Department of Veterans Affairs to help servicemembers, veterans, and their families buy homes.

- Construction Loans: build a brand new home and include an ADU in the plans

- Renovation Loans: From Fannie Mae HomeStyle, Freddie Mac Choice Renovation and FHA 203(k) a renovation loan can act as a bridge between what a property is now, and what it could be with a bit of extra work.

Loans You Can’t Use Rental Income from ADUs to Qualify

USDA Loans: If you’re looking to buy a home outside of a big city, with no down payment, a USDA home loan is a great option. However, you cannot use rental income from an Accessory Dwelling Unit on the property to qualify for the mortgage. With a USDA loan, you would be better off using the ADU for single-family living, multigenerational living situations, or an office/additional space for those residing in the main unit.

Considering the Next Steps with an ADU

If you’re interested in exploring the possibility of adding an Accessory Dwelling Unit to a property you’d like to buy, or purchasing a property with an Accessory Dwelling Unit already onsite, here are some next steps:

- Get Preapproved! As a home mortgage lender near you, I’m excited to explore if buying a property with an ADU, or building onto an existing property is right for your goals. Together we can determine the budget for your plan and we can guide you through your next steps. We’ll also discuss which loan options are available to you based on your financial situation and how you plan to use the ADU.

- Talk to an Agent. If you haven’t yet talked to a real estate agent, we are happy to provide a recommendation. Someone who is experienced in buying or selling income producing properties including ADUs will have a ton of knowledge and info to give you. They can guide you around potential pitfalls before you even start searching for the right property.

- Research local zoning regulations and permitting processes. Contact your local planning department to learn about the specific requirements in your area.

- Consult with a qualified architect or builder experienced in ADU construction. They can help you assess the feasibility of your project and navigate the design and permitting process.

By carefully considering these factors and taking the necessary steps, you can determine if an Accessory Dwelling Unit is the right fit for you and unlock the potential value and functionality it can add to your current or future property.

If you’re in the market for a new home, you’re probably keeping an eye on the current interest rates. When rates are low, it can be easier to jump into the homebuying process, but not so much when rates are high. Fortunately, if you’re ready to buy a home now, there’s something you may be able to do to pave the way for more manageable mortgage payments, regardless of what the market is up to. One of these handy strategies is called a Temporary Buydown.

Explaining Temporary Buydown Mortgages

A Temporary Buydown is an option where a buyer is able to temporarily reduce the interest rate on their new loan, in exchange for a one-time fee at closing. This tactic can give a homebuyer some breathing room and help ease into the full mortgage payment through the first few years of the loan, especially in a high interest rate environment.

How does a Temporary Buydown Work?

There are different buydown options, each offering a specific reduction in interest rate for a set period.

At NFM, we offer three different types of temporary buydowns:

1 Year Buydown (1-0 ): This option allows for the effective rate of interest paid by the buyer to decrease by 1% for the first year of the mortgage loan.

2 Year Buydown (2-1): The option allows for the effective rate of interest paid by the buyer to decrease by 2% for the first year of the mortgage loan and 1% for the second year.

3 Year Buydown (3-2-1): This option allows for the effective rate of interest paid by the buyer to decrease by 3% for the first year of the mortgage loan, 2% for the second year and 1% for the third year.

Temporary Buydown Example

Let’s say you secure an 8% interest rate on a 30-year fixed-rate mortgage with a 3 year buydown (3-2-1 buydown).

Year 1: Your payment will be based on a 5% interest rate (8% – 3% = 5%).
Year 2: You’ll make payments calculated at a 6% interest rate (8% – 2% = 6%).
Year 3: Your payments reflect a 7% interest rate (8% – 1% = 7%).
Year 4 onwards: Your monthly payments transition to the original 8% interest rate for the remaining loan term.

So, for as long as you own the home, or until you refinance to a new loan with a potentially lower interest rate, you will continue to make the principal and interest payment based on this 8% rate.

Temporary Buydown Calculator

Use our temporary buydown calculator to estimate the cost and potential savings associated with different buydown scenarios. We can also discuss if this makes financial sense for you any time!

Who Pays for a Temporary Buydown?

There are several ways to fund a temporary buydown:

Seller/Builder Concession: Traditionally, sellers or builders will offer a temporary buydown as a seller concession to attract buyers, especially in a slow market.

Buyer Funded Buydown: You can choose to pay for the buydown yourself at closing. This might be a good option if you have the savings and want to lock in lower monthly payments in the early years of your loan.

Lender or Realtor Incentive: In some cases, lenders or real estate agents may offer a temporary buydown as part of a promotional package.

Funding and Cost Considerations

The party responsible for paying for the buydown pays the amount as a closing cost when the loan is funded. The amount is equal to the buyers interest savings. Meaning the difference between the final note rate and the agreed lower interest rate during the first years of the loan.

These funds are deposited into a custodial escrow account at closing. The loan servicer then draws from the account every month to make up the difference between the full loan payment and the discounted bill the homeowner is paying.

Temporary VS Permanent Buydown

While both options involve lowering your interest rate, temporary and permanent buydowns have key differences:

Reduction Amount: Temporary buydowns offer a more significant initial reduction (up to 3%) compared to permanent buydowns (typically 0.125% – 0.5%).

Loan Structure: Temporary buydown funds are held in an escrow account and used to supplement your monthly payments. In a permanent buydown, the lender reduces the loan amount itself.

Buyer Qualification: For a temporary buydown, you need to qualify for the full loan amount and original interest rate even though you’ll pay lower rates initially. Conversely, you only need to qualify for the reduced interest rate with a permanent buydown.

When is the best time to use a Temporary Buydown?

Temporary buydowns can be a good idea for first-time home buyers who are shocked by the speed at which mortgage rates have risen, and who will deplete their savings on the down payment and closing costs. The temporary payment reduction allows borrowers to replenish savings or spend the money on home upgrades.

The most favorable time to take advantage of a buydown is when the seller or builder is offering to contribute cash towards closing. Sometimes this can happen as an incentive to get a buyer to purchase their home or to encourage the purchase of a home in a newly built community. If this isn’t an option, a buyer can often still pay down the rate themselves.

Final Thoughts

Now that you understand temporary buydowns, it’s crucial to weigh the pros and cons against your individual financial situation and homebuying goals. Consulting with a mortgage professional is the best way to determine if a temporary buydown aligns with your needs. They can assess your eligibility, calculate potential costs and savings, and guide you through the entire mortgage process.

Beyond temporary buydowns, there are other strategies to navigate the homebuying journey in today’s market. Our team of home loan experts is dedicated to helping you explore all your options. Additionally, check out our blog for informative articles on various mortgage programs, down payment assistance, and tips for first-time homebuyers.

Let us empower you to make informed decisions and turn your dream of homeownership into reality. Contact us today to schedule a free consultation!

*Reduction in payment is the result of builder or seller concessions used to buy down the rate and are not guaranteed by NFM Lending. 5% down payment is the responsibility of the borrower. Available for fixed-rate conventional, VA, USDA, and FHA loans. For new or existing home purchases only.

We love helping Gen Z and millennials navigate the exciting world of homeownership. Let’s face it, between inflation, student loans, monthly bills and trying to go on vacation someday, saving for a down payment can feel like climbing Mount Everest in flip-flops. But what if there was a way to hack the system, own a piece of real estate and potentially live for free (or close to it)? Buckle up, because we’re diving into the world of house hacking strategies.

What is House Hacking?

Imagine this: you buy a nice duplex in a good area with two separate units. You live on one side, rent out the other, and – plot twist – that rent covers most, if not all, of your mortgage payment. That’s the magic of house hacking! It’s all about buying a multi-unit property (think duplexes, triplexes, or fourplexes) or a single-family home with a rentable space (like a finished basement or in-law suite). You live in one unit and rent out the others, turning your home into an income stream.

Benefits of House Hacking:

With so many young adults hoping to buy homes, and rent prices are brutal these days and house hacking offers a way to save money on your living expenses. Ideally, your rental income covers most of your mortgage payment, property taxes, and insurance (PITI). That translates to living for free (or very cheap) while building equity in your property – a major win-win!

But house hacking goes beyond just saving money. It’s a springboard for ambitious young adults or anyone interested in financial independence. Here’s how:

- Jumpstart Your Investment Journey: House hacking gives you valuable real estate experience. You learn the ropes of being a landlord, from screening tenants to managing minor repairs. This knowledge becomes a steppingstone for future real estate investments, allowing you to build wealth and diversify your income streams. It’s often said that the average millionaire has around 7 income streams. So, add rental income to your other income stream(s) and you’re one step closer to retirement!

- Build Equity While You Live: Remember that house you’re living in? As you make mortgage payments and property values hopefully increase, you’re building equity – essentially ownership – in your property. This equity can be tapped into down the line for various purposes, like a bigger investment property, upgrading with renovations to your current property/properties, or even paying down consumer or student debts.

- Become a Mini-Landlord Boss: House hacking equips you with valuable life skills. You’ll learn business budgeting basics to manage your property’s finances, hone your people skills when screening tenants, and even develop some DIY prowess for minor maintenance tasks.

House Hacking Strategies:

House hacking isn’t a one-size-fits-all strategy. The beauty lies in its flexibility. Here are some popular house hacking approaches to consider:

House Hacking with Roommates

Maybe you’re not quite ready to jump into managing a separate unit. House hacking with roommates is a fantastic way to test the waters. Here’s the idea: you find a single-family home with extra bedrooms and share it with responsible roommates. Their rent contribution significantly reduces your monthly housing costs, freeing up cash for other goals.

Pro Tip: When screening roommates, prioritize responsible individuals who align with your lifestyle. Open communication and clear house rules are key to a harmonious co-living experience.

Hacking a Multi-Unit Property

Ready to dive deeper? Look into multi-unit properties like duplexes, triplexes, or even fourplexes. These properties offer dedicated rental units that provide a more consistent and potentially higher rental income compared to roommates. Live in one unit, rent out the others, and watch your rental income potentially cover a significant chunk of your mortgage payment.

Things to Consider: Multi-unit properties come with additional responsibilities like managing separate entrances and potentially maintaining shared yards. Make sure you’re comfortable with the extra workload before taking the plunge.

House Hacking with an ADU

Does your dream home have a finished basement or a separate in-law suite? An Accessory Dwelling Unit (ADU) could be your perfect house hacking setup. You could rent out the additional space for a steady income stream while still enjoying the privacy of your main living area.

Keep in Mind: Pay attention to local zoning and permit regulations for specific requirements for renting out any type of ADU. Do your research and ensure your property complies with all the rules before advertising the space. Your friendly real estate agent should be able to help you understand your local limitations (let us know if you’d like us to connect you with someone we trust!)

Getting Started with House Hacking:

House hacking might sound complex, but with the right guidance, it can be a smooth and rewarding experience. Here’s how we can help you navigate the house hacking journey:

The Financials:

- Loan Options: The absolute best part (in our opinion) of house hacking is that these homes can be purchased with a traditional mortgage (think FHA, VA, USDA and Conventional loans) with more competitive interest rates, depending on your credit score and financial situation than if you were to purchase an investment property separate from your primary residence.

- Down Payment Assistance: There are fantastic programs available to help first-time homebuyers with their down payment. We’ll explore these options and see if you qualify for any additional down payment assistance programs.

- Affordability Calculations: House hacking isn’t just about finding a cool property. We’ll do a deep dive into your finances to ensure you’re comfortable with the ongoing costs of ownership, including property taxes, insurance, and potential maintenance needs. We’ll also factor in projected rental income to create a realistic picture of your monthly expenses.

Building Your Dream Team:

House hacking doesn’t have to be a solo act. Here’s how I can help you assemble your dream team:

- Realtor: A good realtor is your partner in crime when it comes to finding the perfect house hack property. If you aren’t already working with someone, we have trusted, experienced partners we can connect you with who understand the house hacking market and can guide you through the buying process.

- Property Management (Optional): If managing tenants seems daunting, consider partnering with a reputable property management company. They can handle everything from tenant screening and rent collection to maintenance requests and repairs, freeing up your time and minimizing stress.

- Lawyer: When contracts are involved, it’s always a wise decision to lawyer up and make sure your lease or rental agreement is rock solid. You don’t want to take on the financial burden of someone else’s mistakes if it can be helped.

Finding the Right Property:

- Location, Location, Location: Just like any real estate investment, location is key. Discuss with your real estate agent neighborhoods that have a high rental demand and good potential for stable tenant occupancy.

- Rental Potential: Not all properties are created equal for house hacking; analyze factors like the number of bedrooms and bathrooms in the rentable units, overall square footage, and amenities that might attract tenants and command higher rent.

- Property Types: It’s obvious to say that different house hacking strategies require different property types. Whether it’s a multi-unit property with separate entrances or a single-family home with a rentable basement, all of that will be covered while you work with your homebuying team.

Conclusion:

House hacking isn’t for everyone. It requires some upfront effort, financial responsibility, and a willingness to learn. But for ambitious go-getters, who are ready to take control of their financial future, house hacking can be a game-changer. It allows you to live for free (or close to it), build equity, gain valuable real estate experience, and potentially set yourself on a path to financial freedom.

Ready to chat? Let’s schedule a consultation to discuss your financial goals and see if house hacking aligns with your vision.

In life, sometimes you need help getting from Point A to Point B. When it comes to buying a home, bridge loans are one way to, well, bridge that gap. NFM Lending and the Family of Lenders have partnered with Knock to offer borrowers a streamlined way to sell and buy a home. Learn how their unique HomeSwap™ program works and whether it’s right for you.

HomeSwap™ is a bridge loan offered by Knock through NFM Lending and its divisions. A bridge loan is a short-term loan that provides temporary financing until more permanent funds can be acquired. Also called swing or gap loans, bridge loans often last from 6 months to a year. They’re frequently used by home buyers who want to purchase their next home without having to wait for their current home to sell, and HomeSwap™ was designed exactly for such scenarios.

When you’re trying to buy and sell a home simultaneously, sometimes the timing doesn’t align, and you end up “between homes.” Many homebuyers worry they’ll temporarily be without permanent housing until their first home sells, and adding a selling contingency to an offer could reduce the chances of it being accepted. Using the HomeSwap™ loan helps prevent both from happening. First, make sure you’re already working with NFM or one of our divisions for mortgage pre-approval. Your loan originator will assess whether you’re eligible for the HomeSwap™ program, and the Knock team will check if your current residence qualifies for their services. If you have at least 30% equity in your existing home, you can leverage up to $650,000 of it, interest-free for up to six months, to put towards the purchase of your new home. This gives you the advantage of preserving more of your savings simply by using the equity you’ve already built! The more equity you’re able to access, the lower your interest rate can be.

Once you’ve been determined eligible, the Knock team will get started on pre-approving you for a fully underwritten, interest-free* bridge loan. One benefit of the HomeSwap™ loan (and bridge loans in general) is that the underwriting process happens much faster than for a regular mortgage. Since the short-term loan will be based on the value of your current home, you’ll need to take numerous photos of the inside and outside of the property so the Knock team can judge the property’s condition.

After the bridge loan is pre-approved, go out and find a new home! Because you’re pre-approved for a mortgage and the HomeSwap™ loan, you can shop with confidence. When you’ve found a home you love, you can make a competitive offer without tacking on a sales contingency. Don’t worry about selling your existing home now—that will come later. HomeSwap™ gives you breathing room to buy and move into your new home without also going through the stress of showing your old home, finding and moving into temporary housing, or having the buyer’s financing fall through.

Now that you’re more settled in your new place, you’re ready to sell your old house! To help sell your home faster, and ideally, for more money, HomeSwap™ offers up to $35,000** in Pre-Imbursement to help with repairs, upgrades, or staging costs. These funds are already factored into the loan cost, saving you additional money on such expenses. Another stressor that’s off your plate? Paying the mortgage on your former home while waiting for it to sell. HomeSwap™ can cover up to 6 months of your old mortgage payments so you’re only paying the one mortgage of your new home! After your home sells, you use the profit to pay off the HomeSwap™ loan. Any leftovers can be used towards your new home’s mortgage or debt payoff.

HomeSwap™ streamlines the buying and selling process for homebuyers, especially in a seller’s market. It works well in a seller’s market because there’s a higher likelihood that your current property will sell quickly. Be sure to speak with your lender and real estate agent so they can gauge the health of your local housing market and discuss your options. In addition to regular closing costs, there is a contract fee based on the estimated list price of your old home for using Knock’s services. This cost can be paid at closing or rolled into your HomeSwap™ loan. Additionally, it will be easier to be approved if you have a strong credit score and low debt-to-income (DTI) ratio.

Don’t have to let market uncertainty keep you from selling your current home and moving into a new one! The Knock HomeSwap™ loan offers you peace of mind that you can cover the expenses of your new home while waiting for your old one to sell.

*Interest-free for up to six months. **Actual amount is based on client’s individual equity position. This is a co-marketing piece with Knock Lending LLC, NMLS #1958445. You are entitled to shop around for the best lender for you. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice.

It’s normal to feel confused and a bit overwhelmed when buying your first home—it’s a complex process with many moving pieces. To make your inaugural homebuying experience smooth and successful, here are some common mistakes to avoid when buying your first home.

If you’re seriously in the market to buy a home, getting pre-approved with a lender first is a must! A pre-approval involves submitting various financial documents and proof of identity to your lender, as well as allowing them to run a hard credit check on you. A pre-approval differs from pre-qualification in that the former takes a more comprehensive look into your finances and is a hard credit inquiry (your score will drop slightly temporarily); a pre-qualification just gives you a rough estimate on whether you can afford a home based on self-reported information. A pre-approval also has much more weight when you’re house hunting and gives you an idea of how much home you can afford. If you’ve found a home you love, having a pre-approval letter makes you seem like a more serious buyer and can help move the mortgage process along more quickly. Be aware that pre-approval letters are good for 60-90 days, and you’ll need to go through your lender to get an updated one after the first one expires. Once you’re pre-approved, you can find a great real estate agent and shop with confidence!

Being able to buy a house is one thing, being able to keep it is another. When your lender comes back with the pre-approval, you’ll be given a figure for the maximum amount you can borrow. Depending on whether you use less than the max or the full amount, that will be reflected in your monthly payment. However, even if you’re approved for a larger sum of money, it’s not always a good idea to go to the limit. A good rule of thumb is to not spend more than 28% of your gross income on mortgage payments. When a significant amount of your paycheck goes to your mortgage, you become house poor. The amount you’re comfortable borrowing is a personal decision, so make sure you have the cash flow to support regular mortgage payments, as well as other homeownership costs.

Becoming a homeowner is a huge life change, both personally and financially. If you’ve only ever rented, you might be surprised at just how much owning a home costs. Aside from your regular mortgage payments, you’ll need to account for escrow payments (property taxes and home insurance), regular maintenance costs, and emergency repairs, and sometimes private mortgage insurance (PMI). If your home is part of a homeowner’s association (HOA), expect to pay yearly or monthly dues. Seeing as most of these costs are variable and unpredictable, it’s wise to create separate savings just for home expenses. Try putting aside money as you prepare to begin the homebuying process or after you’ve closed on your home.

When your lender tells you closing is around the corner, you’re basically home free, right? Not exactly. Your mortgage and home purchase haven’t officially been finalized, so it’s crucial to maintain your credit score, cash supply, and debt-to-income (DTI) ratio until then. Activities to avoid before closing include: quitting your job, applying for or cosigning a loan, applying for a credit card, closing lines of credit, and making large, unnecessary purchases (like buying or leasing vehicles, furniture, or expensive trips). Doing these things can delay or even make you ineligible for mortgage approval. If you’re in what you feel is an emergency situation, contact your loan originator right away and tell them what’s happening. They’ll let you know how best to proceed in a way that won’t threaten your closing.

Choosing the right real estate agent for your needs is important any time you’re buying or selling a home, but especially if you’re a first-time buyer! Don’t pick just any real estate agent to help you buy your first time—be sure to thoroughly interview and research several local agents. When interviewing agents, ask about their communication style, familiarity with the area, industry experience, local market trends, and reviews from past buyers. Additionally, if you’re using a specialized mortgage to purchase your home (such as a VA loan), seek out agents who are well versed in working with buyers like you. Besides their technical know-how, the strong agent should also be a good listener and friendly.

Buying a home comes with many challenges, and even more so if you’ve never done it before. Fortunately, there are many factors you can control that will mean the difference between having an exceptional home buying experience instead of an exasperating one.

NFM Lending is a national mortgage lending company currently licensed in 49 states in the U.S. and Washington, D.C. The company was founded in Baltimore, Maryland in 1998. NFM Lending and its family of companies includes Main Street Home Loans, BluPrint Home Loans, Elevate Home Loans, and Element Home Loans. They attribute their success in the mortgage industry to their steadfast commitment to customers and the community. For more information about NFM Lending, visit www.nfmlending.com, like our Facebook page, or follow us on Instagram.

For many aspiring homeowners, coming up with a down payment is a significant obstacle standing in the way of homeownership. While having a 20% down payment isn’t required to buy a home, it can be challenging to gather enough funds to start the home buying process. Read on to learn about different ways to come up with a down payment.

Saving money is perhaps the obvious first choice when it comes to collecting a down payment. The process of putting away extra money usually happens gradually, so it’s best to start a dedicated savings account as soon as possible. Increase your savings potential by creating and maintaining a household budget. You might also consider starting a side hustle or asking your employer for a raise to increase your cash flow. Growing your savings will be beneficial when you’re ready to begin your home buying journey, even if you find you won’t need much for your down payment.

Down payment assistance (DPA) programs are an underrated way to partially or fully subsidize your down payment. There are many DPA programs offered to homebuyers at the federal and state level, from both public and private institutions. DPA programs are often tailored to first-time or low-income buyers, but repeat homebuyers may be eligible for certain programs. The DPA funds can come in the form of a grant or a low interest second mortgage that may be repayable or forgiven after a set amount of time. If you’re part of a particular profession, such as teaching or law enforcement, there are DPA programs designed to help you become a homeowner. Taking advantage of DPA allows you to secure your dream home and save for other expenses. Make sure to ask your loan originator if you qualify for any down payment assistance programs.

Your down payment doesn’t have to come entirely from you; all or part of it can come from family and friends in the form of gift funds. In order to use gift funds in your down payment, have your benefactor send your lender a gift letter detailing the amount given, their relationship to you, withdrawal dates, and a statement that repayment is not expected. Your lender may also need to see accompanying withdrawal and deposit slips to source the money. It’s important to know that if your contributor expects you to repay the gifted money, it will be considered a loan and will be factored into your debt-to-income (DTI) ratio.

401(k)s are meant to be accessed upon reaching age 59 ½ , but tapping into it earlier can boost your down payment amount if needed. You can either use a 401(k) loan (if offered by your employer), or withdraw funds. Both methods allow you to access cash on hand without going through a lender or credit check. A 401(k) loan lets you borrow against your retirement savings and must be restored within five years with interest. Your employer may pause 401(k) contributions until the loan is paid back. Withdrawing money from your account will lead to a 10% penalty fee, and any amount you remove will be subject to an income tax. You will also forfeit any tax-free retirement earnings that you have accrued. For these reasons, this option is best used only as a last resort. It’s essential to consult with a financial advisor so you fully understand what’s involved.

Getting a down payment ready doesn’t have to be the thing that stops you from achieving homeownership! If owning a home is something you want to accomplish, it’s ever too early to start saving and preparing for one of the most important purchases of your life.

NFM Lending is not a financial or tax advisor. You should consult a financial advisor to assist with your financial goals.

Reaching the closing stage in the homebuying process is always exciting! Closing officially marks the beginning of your new life in your new home, but there’s more involved than just getting the keys–here’s what you can expect at closing.

A few days before attending closing, you need to perform a final walkthrough of the home with your real estate agent. Final walkthroughs give you the opportunity to ensure there are no outstanding issues with the property and that the sellers made appropriate repairs if they were part of the negotiation. Check that major appliances, electricity, HVAC systems, and plumbing work properly. If you find something that needs to be addressed, it may delay the sale. Regardless of the home type or whether it’s a new build or is pre-owned, doing a final walkthrough is highly encouraged. It’s better to check beforehand than to sign the papers and discover a problem when you move in.

At least three business days before your closing date, you’ll receive a closing disclosure (CD) from your lender. The CD gives a breakdown of your loan terms, loan costs, closing costs, projected payments, cash needed at closing, and more. Review your CD carefully to ensure you understand the loan terms and that everything is accurate. Even something as seemingly insignificant as a misspelling will be an issue if left uncorrected. If you see any errors or have questions, contact your loan originator immediately.

When you arrive at the closing table, bring a valid photo ID and proof of homeowner’s insurance. These will be needed to verify your identity and show that the property is protected from accidents. On closing day, you’ll be signing more key documents in the loan package, like the promissory note, the mortgage itself, the deed, title transfer papers, the bill of sale, and the notice of servicing disclosure. Your lender and real estate agent should inform you of all the documents you’ll need to sign and what they mean prior to closing. Let your real estate and lending team know if you see errors or are unsure about anything.

The cash to close consists of closing costs, the down payment, and prepaid costs (like HOA dues), minus any credits you receive. You’ll know the exact figure from the details in your CD; contact your lender if you see a mistake. If you’re paying any of these costs out-of-pocket, bring a cashier’s or certified check, or have the amount wired to the title company a day or two before closing. When doing a wire transfer, avoid scams by confirming the address directly with your title agent. After the money has been disbursed and all the documents have been signed,the property transfer will be complete. The title company or real estate attorney will submit the documents to your local government’s public land records for recording. Congratulations—you just closed on your new home!

It takes a lot of hard work to get to the closing table, so celebration is definitely in order! No matter how eager you are to finish signing papers and get your keys, it’s imperative to take your time reading everything thoroughly. Having everything in order before the closing date will help reduce last-minute snags or surprises.

When you’re considering different home loan products, one key question you should ask yourself is whether you want a fixed-rate or an adjustable-rate mortgage (ARM.) Many people become entranced by the ARM’s lower interest rates, but there’s more to them than their attractive rates. Here’s what you need to know about adjustable-rate mortgages.

Mortgages can generally be categorized into two types: fixed-rate mortgages and adjustable-rate mortgages. As their names suggest, the interest rate for an ARM is variable and can change over the life of the loan. ARMs are appealing because of their lower starting rate and the money-saving benefits during the beginning of the loan. It’s important to be financially prepared when the rate adjusts, as no one can predict how much they will change in the future. Having an ARM can become a problem if the rate increases to a point where you can’t afford to make payments. This element of uncertainty is why ARMs typically have lower rates than fixed-rate mortgages.

Hybrid ARMs have an initial fixed-rate period (often for 5, 7, 10, or 15 years) during which you’ll pay the same interest rate you closed on. After that period ends, your rate adjusts to whatever the current rate is for the life of the loan. The rate adjustment period can vary depending on the loan. Hybrid ARMs have an interest rate cap that limits how much the rate can increase or decrease within a certain timespan. For example, a 5/1 ARM may be structured with a 5/2/5 rate cap where after the first five years, the rate can be up to 5% higher than your initial rate in the sixth year. After that, the rate can increase up to 2% from your starting rate for the rest of the term. The last number in the rate cap indicates the maximum the rate can increase during the life of the loan, which is 5%. Make sure you understand and consider the loan’s rate cap so you know how much you could be paying. Locking in a competitive rate for the first few years gives you time to build savings, and you could save even more if the rate drops in the future.

With interest-only ARMs, you pay a lower rate upfront and only make interest payments for a certain amount of time. Your monthly payment will be lower since you’re just paying interest. Be aware that you won’t be gaining equity since your payment isn’t going towards the principal. After the interest-only span is over, you’ll be making interest and principal payments, while being subject to an adjustable rate. Interest-only ARMs also have rate caps. Make sure you understand the repayment terms, as some loans may require a balloon payment where the entire balance is due soon after the interest-free period.

Though fixed-rate mortgages are perennially popular, adjustable-rate mortgages can be a good fit for some buyers. An ARM works well for people with flexible lifestyles and finances. For instance, if you have a solid level of savings, you’ll have more breathing room if rates rise significantly. This loan can also be beneficial if you expect your income to increase within the first several years of owning your home. For those who don’t expect to live in their house long (like if you have a starter home), an ARM lets you take advantage of the lower rate and build equity when it’s time to sell. If you decide later that you’d rather not deal with a varying rate, look into refinancing to a fixed-rate mortgage.

If the higher rates of fixed-rate mortgages are keeping you from becoming a homeowner, an adjustable-rate mortgage can be a helpful alternative. Even though your rate will change every now and then, the potential savings could make having a variable rate worthwhile.