Playing Your Cards Right: Avoiding the debt zombie apocalypse

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Households with credit card debt are spending more than households without credit card debt in seven of the nine discretionary spending categories that our sister site, CreditCards.com recently asked about. This is a really big problem because the average credit card charges a record-high 17.86 percent. If you have credit card debt, you’re essentially spending 18 percent more for everything you buy.

I want to highlight that these are discretionary purchases – not housing and groceries. And they’re big line items, which is important because I’m not into the whole latte-shaming thing. If you’re in debt, it’s probably not because of small luxuries. A $425 monthly car payment is much more likely to be the culprit. That’s about $5,100 a year.

Or if it’s not the car payment, maybe it’s leisure travel or dining out. The average household with credit card debt that spends on leisure travel runs up an annual bill of $2,211, and dining/takeout is close behind ($2,186).

There’s also clothing/shoes/accessories ($1,892), cell phone services/upgrades ($1,629), out-of-home entertainment ($1,538), fitness ($1,385), subscription services ($1,198) and personal care/beauty ($1,146).

Remember, these expenditures are optional! Even the car payment. You might need a car to get to work and elsewhere, but you don’t need a brand-new car. The average new car costs $37,577, according to Kelley Blue Book. On average, $31,099 of that is financed, Experian reports, for 69 months. That’s almost six years of $500+ monthly payments and a big reason why so many households are in debt.

Buying a cheaper used car or holding onto your existing car a bit longer would save a ton of money. You could also opt for public transportation or ridesharing services such as Uber and Lyft. And note, these car payment figures I’m quoting are just for the loan. They don’t even include insurance, gas and maintenance, which would conservatively add a few thousand dollars to the annual total.

Lifestyle creep is to blame

A different CreditCards.com survey found that, among those with credit card debt, 56 percent have been in debt for at least a year and 37 percent have been in debt for at least two years. More than a third of credit card debtors blamed emergency expenses for landing them in debt, and 28 percent pointed to day-to-day costs. However, many people are blurring the line between necessary and discretionary.

In all nine categories, the CreditCards.com data found fewer than half of respondents would be willing to significantly trim their spending in order to save money. Yikes!

I don’t mean to sound like you can’t have any fun. I just think there are plenty of ways to have fun that don’t end up costing you an arm and a leg. The Federal Reserve says the average household with credit card debt owes $5,700. If you only make minimum payments at 17.86 percent, you’ll be in debt for 19 ½ years and you’ll end up paying $7,526 in interest. That’s a recipe for financial disaster. How can you save for retirement, college tuitions and other priorities if you’re living like that?

The median household credit card debt is $2,300. It could potentially be retired in one year if the family opted for a staycation rather than a big trip. Even cutting your annual dining out bill in half would make a huge dent. So, turn a restaurant visit into a special treat rather than a weekly (or in some cases, daily) habit. Pro tip: bring your lunch to work for one week and see how much money you save.

Other ways to get out of credit card debt

Besides raising your income (through a side hustle, perhaps) and cutting your expenses, take advantage of balance transfer credit cards. These allow you to move a high-rate credit card balance to a new card with a 0 percent interest rate for up to 21 months.

Refrain from making new purchases on this card. Divide how much you owe by the number of months in your no-interest promotion and stick to that monthly payment schedule. You’ll knock out the average $5,700 debt with 21 payments of $271 and change. Beware of transfer fees – that 21-month offer (the Citi Simplicity® Card) charges a 5 percent transfer fee. Most balance transfer cards charge a transfer fee ranging from 3 to 5 percent.

The longest 0 percent period without a transfer fee is 15 months (available on the Chase Slate, the BankAmericard® credit card and the Amex EveryDay® Credit Card from American Express). In all three instances, you need to transfer the balance within 60 days of opening the account to get the transfer fee waived.

I’m confident that everyone can get out of credit card debt – usually in no more than a year or two – if they sign up for a balance transfer card and make lifestyle modifications such as earning more or spending less.

More from Ted:

Ted Rossman is the industry analyst and columnist at Bankrate.com and CreditCards.com. He has been interviewed by hundreds of media outlets, including the Wall Street Journal, Forbes, NBC Nightly News, CBS News, CNBC and Fox Business. Ted also writes the “Wealth and Wants” column for CreditCards.com, which focuses on cash back cards. He previously spent seven years as a member of the award-winning communications department at CreditCards.com and its sister sites, The Points Guy and Bankrate.

How to Pay for Relocation

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Moving is one of the most stressful life events you can endure — especially if you aren’t confident you can afford it. Whether you’re moving for a new job or personal reasons, there are a variety of factors that affect the cost and timeline of your move.

As a result of tax reform, Americans can no longer deduct moving expenses. So depending on how much help you get from your family, friends, or your new employer, the entire cost of the move might rest on your shoulder. Thankfully, there are a few quick, effective options to help ease the financial burden of embarking on a new adventure.

The repeal of the moving expense deduction

Under the previous law, taxpayers were allowed to deduct some of the costs of moving their goods and effects, plus certain travel expenses. But as of 2018, exclusion for qualified moving expense reimbursements and deductions are both suspended until 2025. The one exception is members of the military on active duty who move due to a military order.

The cost of moving

Consider this: The American Moving and Storage Association says that the average cost of an interstate household move costs about $4,300. That’s no small expense. Even moving within the state costs an average of $2,300.

Every move is unique, but here are six common expenses to help estimate what your move might cost:

• Movers.

  Hiring movers is one of the most important expenses you’ll make — you get what you pay for.

  HomeAdvisor

  found that the average move costs around $800, but that can vary widely based on the location, travel, and amount of goods and personal items you need to transport.

• Travel.

  Gas, lodging, and food can add up quickly. And if you’re flying, it’s easy for a small family to rack up over $1,000 for a one-way domestic flight. Travel to your new home the potential to be the biggest expense of all.

• Boxes.

  Boxes can generally be obtained for free from grocery or department stores. If you need containers for transporting fragile items, remember that durable plastic tubs can cost more than $20 each depending on the size.

• Storage.

  If your move takes longer than expected because a house closing is delayed, for example, you might have to put some of your belongings in storage. The cost of a self-storage unit varies widely and depends on the location. CostHelper.com says a self-storage unit that’s 10 feet by 20 feet typically ranges from $95 to $155 a month, and $170 to $180 if the unit is climate-controlled.

• Replacements.

  Odds are, at least a few things will be broken during your move. Remember to set aside some money to cover replacements.

• Deposits and fees.

  It’s possible that you may have to pay early termination fees for services like cable or utilities. You might even have to put down a deposit for services at your new place prior to your 

Instate vs out of state long distance moving costs

According to Homeadvisor, here are the average costs for local and interstate moves. Local moving is any move under 100 miles within the same state and interstate or long distance moving across the country or over state lines. 

Type of mover Average Charge Extra charges Local/Intrastate $80-$100 per hour +25-$50 extra per additional mover Interstate/Cross Country $2000-$5000 per load $0.50 per pound

Costs of moving based on house size

These are average costs for moving based on house size, according to HomeAdvisor. The chart is based on average hourly rates charged by local moving companies.  

Size of house Estimated time of move Average price range

1 bedroom apartment

3-5 hrs $200-$500 2 bedroom apartment 5-7 hrs $400-$700 3 bedroom house 7-10 hrs $560-$1,000 4 bedroom house 10+ hrs $800-$2,000+

How to pay for your relocation

Personal loans

It’s ideal to pay for your move upfront, but that’s not always possible. If you need to finance some or all of your move, applying for a personal loan is one of the best options to consider. Personal loans are either secured or unsecured loans that are paid off in equal installments (what’s known as installment debt), usually over two- to five-year terms. The monthly payments include both principal and interest.

The main benefit for using a personal loan for your move is the interest rate. Borrowers with excellent credit can score rates around 10 percent. Those with good credit fall in the 13 – 15 percent range. With a credit card, good credit could get you a rate around the lower 20s. Over the lifetime of a loan, just a few points can make a big difference in the amount of interest you’ll pay.

Personal loans can be obtained from banks, credit unions, and online lenders. The application process is usually easiest with online lenders, but overall they’re much quicker than other loans. Sometimes the approval process might just take a few days.

 Credit cards

A credit card (sometimes multiple cards) might seem like a good way to pay for your move quickly. You might even be thinking about the potential to earn rewards in the process. But it’s not always the best idea.

Credit cards offer revolving debt, which means that, unlike personal loans, you don’t have to re-apply for credit when you need more money. The downside to that, however, is a higher interest rate. A good credit score will get you a credit card with an APR around 18 percent to 20 percent, while a personal loan can be closer to 10 percent.

Personal loan

Monthly payment Details Term Interest Paid $98.22 11% APR 36 months $535.78

Credit card loan

Monthly payment Details Term Interest Paid $120

12-month 0% intro APR, then 21%

36 months $979.92

Credit card loan

Monthly payment Details Term Interest Paid $300

12-month 0% intro APR, then 21%

10 months $0

Let’s say you’ve crunched the numbers, and you expect your total expense to be $3,000. (That’s pretty conservative, even for an intrastate move.) And the largest monthly payment you can afford is around $100. A personal loan with an 11 percent APR and 3-year term will get you a monthly payment of $98.22. Over the life of the loan, you’ll pay around $536 in interest.

Most zero percent introductory credit card offers run from 12 to 18 months. So if you could afford to pay around $300 toward your balance every month, you could benefit from a credit card because you wouldn’t incur any interest. If not, a personal loan offers a lower payment and saves more than $400 over the life of your loan. Plus, you can’t be tempted to swipe a personal loan at the department store and add to your debt.

Here’s the bottom line: You should only use a credit card with a zero percent introductory interest rate offer for larger expenses, like relocation, when you can afford to pay several hundred dollars on your balance every month. (Ideally, you should pay it off completely before the 0% intro period ends.)

Don’t forget to ask about relocation assistance

If you’re relocating for work, don’t forget to ask about relocation assistance. It can be difficult to ask for help for fear of sounding demanding or greedy, but remember, the worst your employer can say is no.

 

What Happens When Your Student Loan Servicer Gets Bought

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In August 2018, Andrew Fanno, a 28-year-old lawyer in Boston, refinanced his $200,000-plus student loan balance into Earnest, a popular fintech refinancing company. Fanno was lured by the ability to make biweekly payments through the service and the user-friendly interface.

Two months later, though, the fintech company made a few functional changes, including removing its popular biweekly payment option and changing the dashboard. After doing some research, Fanno realized the changes occurred as a result of the company being acquired by Navient Corp., one of the largest companies that manages student loan debt, in 2017.

“I had no idea the merger was coming,” Fanno says. “And, honestly, I had heard not-so-great things about Navient. It was a bummer.”

It happens more than you might think: You receive a letter in the mail, saying your student loans are being transferred to a new servicer, either from a company buy-out or federal loans being transferred.

Your loans, and those of thousands of other borrowers, will be held under a different company — and no, you don’t get a say in the matter.

What happens when your student loan servicer gets bought

Student loans get transferred from one servicer to another “as part of (the U.S. Department of Education’s) efforts to ensure that all borrowers are provided with customer service and repayment support,” according to the Federal Student Aid website.

And while loan terms often don’t change, it can lead to a confusing shuffling of funds, some of which take borrowers by complete surprise.

Earnest sold for nearly half than its 2015 valuation of $375 million, according to The Wall Street Journal. After, Fanno was notified by mail and email that his loans would be held under Navient. He read his promissory note before signing on to his new loans, which stated that they would be transferred in the future.

The buyout wasn’t shocking for Fanno. It did, however, lead to some disappointing changes.

The acquisition came with two major blows to incentives that led Fanno to Earnest in the first place: the biweekly payment feature was gone, and Fanno says the site began having frustrating glitches.

He plans on refinancing with another company within the next six months.

Important things to consider during the transfer

There are no “rights” that consumers hold when it comes to their loan servicers getting bought, says Mark Kantrowitz, student loan expert and vice president of research of SavingForCollege.com. But there are a few things that borrowers can look out for to make sure the transition goes as smooth as possible.

Kantrowitz offers the following advice.

Auto debits might not transfer to the new servicer

If you have your monthly payments automatically taken out of your bank account, you will likely need to re-enroll in the service once the transition is complete.

Doing so is crucial — most servicers don’t inherit your past authorization and require a new one. If you don’t re-enroll, you might go months without actually making a payment on your loans, which could result in them ending up in default.

Some features might disappear

If you’ve consolidated your loans with another company, like Fanno did, you might lose some enticing features, like automatic biweekly payments.

If you set up something similar with your new servicer, make sure you specify where you want your extra payment to be going. Some servicers might not automatically put it toward interest.

Just because your account says ‘$0’ doesn’t mean your loans have magically disappeared

While it would be a welcomed miracle for an entire balance to “get lost” in the transition, it’s highly unlikely that will happen.

Fanno recalls his balance being $0, as well as expected payments being $0, up until a week before his payment was due.

“I was freaking out a little,” Fanno says.

But just because the balance might be $0, Kantrowitz warns not to let it mystify you.

“Even if you don’t hear from anybody that your loans are still owing, they are,” Kantrowitz says. “You need to make the payments.”

Be proactive about any repayment or forgiveness plans you were previously on

With any data transfer, things can get lost along the way. This can be detrimental if you’re on a loan forgiveness program, like income-driven repayment, where each month’s payment counts toward your loans being erased.

Once the transfer is complete, call the new servicer to confirm your plan.

Make copies of your account balance, monthly payment and schedule

Kantrowitz stresses the importance of keeping records from before and after the transition. He recommends making printouts of your loan balances, as well as your monthly payment amounts, before and after the transition.

By keeping track of how much you owe and what your payments are, you can avoid any mixups from turning into costly interest payments.

“You need to pay attention,” Kantrowitz says. “You need to stay on top of things because if they somehow lose your paperwork during the transition, it will manifest itself in the future.”

Home Equity Line of Credit Payoff Calculator

Refinancing your HELOC into a Home Equity Loan

HELOC payments tend to get more expensive over time. There are two reasons for this: adjustable rates and entering the repayment phase of the loan.

HELOCs are variable rate loans, which means your interest rate will adjust periodically. In a rising-rate environment, this could mean larger monthly payments.

Additionally, once the draw period ends borrowers are responsible for both the principal and interest. This steep rise in the monthly HELOC payment can be a shock to borrowers who were making interest-only payments for the first 10 or 15 years. Sometimes the new HELOC payment can double or even triple what the borrower was paying for the last decade.

To save money, borrowers can refinance their HELOC. Here we’ll take a look at two options and how they work.

Home equity loan

You can take out a home equity loan, which has a fixed rate, and use this new loan to pay off the HELOC. The advantage of doing this is that you could dodge those rate adjustments. The disadvantage is that you would be responsible for paying closing costs.

New HELOC

Apply for a new HELOC to replace the old one. This allows you to avoid that principal and interest payment while keeping your line of credit open. If you have improved your credit since you got the first HELOC, you might even qualify for a lower interest rate.

If you’re interested in refinancing with a HELOC or home equity loan, use Bankrate’s home equity loan rates table to see current rates.

Home equity loans vs. HELOCs

Home equity loans and home equity lines of credit, or HELOCs, are two types of loans that use the value of your house as collateral. They’re both considered second mortgages.

The main difference between them is that with home equity loans you get one lump sum of money whereas HELOCs are lines of credit which you can draw from as needed.

Paying off a home equity loan

The faster pay off your loan, the less interest you’ll pay. You might even be able to reduce your interest rate by refinancing your loan to a shorter term. Often, lenders will reward shorter terms with lower interest rates, so it’s worth investigating if you want to pay off your loan faster.

Before you get the loan, find out if there’s a penalty for paying it off early. If there is a penalty, factor that amount into your calculations.

You should also note any balloon payments that are included in your contract. These are large lump sums owed at the end of your home equity loan term. Some loans are not amortized, which means you could end up making interest-only monthly payments only to have the full principal balance due on a specific date.

This could mean trouble for homeowners who haven’t prepared. If your loan has a balloon payment, set aside enough money each month to make that payment when it comes due.

Paying off a HELOC

HELOCs are different from home equity loans in that they function more like a credit card. Your lender will extend credit, based on several factors including your credit history and the equity in your house. You only owe what you borrow. For example, if you’re extended $50,000 and use just $25,000, then you only owe $25,000.

Many HELOCs allow borrowers to make interest only payments during the draw period, which can vary. Normally, draw periods last between 10 and 15 years. When that period ends, you must make principal and interest payments.

HELOCs can become a drain on your finances if you put off making payments on the principal. If possible, make extra monthly payments on your principal. Like home equity loans, find out if there are prepayment penalties.

First-Time Homebuyer Mistakes To Avoid

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Buying your first home comes with many big decisions, and it can be as scary as it is exciting. It’s easy to get swept up in the whirlwind of home shopping and make mistakes that could leave you with buyer’s remorse later.

If this is your first rodeo as a homebuyer or it’s been many years since you last bought a home, knowledge is power. Along with knowing what issues to avoid, it’s important to glean first-time homebuyer tips from the pros so you know what to expect and what questions to ask.

First-time homebuyer mistakes

Here are 14 common first-time homebuyer mistakes, along with first-time homebuyer tips on how to avoid them:

1. Looking for a home before applying for a mortgage

Many first-time buyers make the mistake of viewing homes before ever getting in front of a mortgage lender. In some markets, housing inventory is still tight because there’s more buyer demand than affordable homes on the market. And in a competitive market, you could lose a property if you aren’t preapproved for a mortgage, says Alfredo Arteaga, a loan officer with Movement Mortgage in Mission Viejo, California.

How this affects you: You might get behind the ball if a home hits the market you love. You also might look at homes that, realistically, you can’t afford.

What to do instead: “Before you fall in love with that gorgeous dream house you’ve been eyeing, be sure to get a fully underwritten preapproval,” Arteaga says. Being preapproved sends the message that you’re a serious buyer whose credit and finances pass muster to successfully get a loan.

2. Talking to only one lender

This one is a biggie. First-time buyers might get a mortgage from the first (and only) lender or bank they talk to, potentially leaving thousands of dollars on the table.

“A good mortgage loan officer can look at your situation and diagnose any potential roadblocks ahead to give you a clear understanding of your home-buying options,” Arteaga says.

How this affects you: The more you shop around, the better basis for comparison you’ll have to ensure you’re getting a good deal and the lowest rates possible.

What to do instead: Shop around with at least three different lenders, as well as a mortgage broker. Compare rates, lender fees and loan terms. Don’t discount customer service and lender responsiveness; both play key roles in making the mortgage approval process run smoothly.

3. Buying more house than you can afford

It’s easy to fall in love with homes that might stretch your budget, but overextending yourself is never a good idea. And with home prices still rising, this is easier said than done.

How this affects you: Buying a home that exceeds your budget can put you at higher risk of losing your home if you fall on tough financial times. You’ll also have less wiggle room in your monthly budget for other bills and expenses.

What to do instead: Focus on what monthly payment you can afford rather than fixating on the maximum loan amount you qualify for. Just because you can qualify for a $300,000 loan, that doesn’t mean you can afford the monthly payments that come with it. Factor in your other obligations that don’t show on a credit report when determining how much house you can afford.

4. Moving too fast

Buying a home can be complex, particularly when you get into the weeds of the mortgage process. Rushing the process can cost you later on, says Nick Bush, a Realtor with TowerHill Realty in Rockville, Maryland.

“The biggest mistake that I see (first-time buyers make) is to not plan far enough ahead for their purchase,” Bush says.

How this affects you: Rushing the process means you might be unable to save enough for a down payment and closing costs, address items on your credit report or make informed decisions.

What to do instead: Map out your home-buying timeline at least a year in advance. Keep in mind it can take months — even years — to repair poor credit and save enough for a sizable down payment. Work on boosting your credit score, paying down debt and saving more money to put you in a stronger position to get preapproved.

5. Draining your savings

Spending all or most of their savings on the down payment and closing costs is one of the biggest first-time homebuyer mistakes, says Ed Conarchy, a mortgage planner and investment adviser at Cherry Creek Mortgage in Gurnee, Illinois.

“Some people scrape all their money together to make the 20 percent down payment so they don’t have to pay for mortgage insurance, but they are picking the wrong poison because they are left with no savings at all,” Conarchy says.

How this affects you: Homebuyers who put 20 percent or more down don’t have to pay for mortgage insurance when getting a conventional mortgage. That’s usually translated into substantial savings on the monthly mortgage payment. But it’s not worth the risk of living on the edge, Conarchy says.

What to do instead: Aim to have three to six months of living expenses in an emergency fund. Paying mortgage insurance isn’t ideal, but depleting your emergency or retirement savings to make a large down payment is riskier.

6. Being careless with credit

Lenders pull credit reports at preapproval to make sure things check out and again just before closing. They want to make sure nothing has changed in your financial picture.

How this affects you: Any new loans or credit card accounts on your credit report can jeopardize the closing and final loan approval. Buyers, especially first-timers, often learn this lesson the hard way.

What to do instead: Keep the status quo in your finances from preapproval to closing. Don’t open new credit cards, close existing accounts, take out new loans or make large purchases on existing credit accounts in the months leading up to applying for a mortgage through closing day. Pay down your existing balances to below 30 percent of your available credit limit, and pay your bills on time and in full every month.

7. Fixating on the house over the neighborhood

Sure, you want a home that checks off the items on your wish list and meets your needs. Being nitpicky about a home’s cosmetics, however, can be short-sighted if you wind up in a neighborhood you hate, says Alison Bernstein, president and founder of Suburban Jungle, a real estate strategy firm.

“Selecting the right town is critical to your life and family development,” Bernstein says. “The goal is to find you and your brood a place where the culture and values of the (area) match yours. You can always trade up or down for a new home; add a third bathroom or renovate a basement.”

How this affects you: You could wind up loving your home but hating your neighborhood.

What to do instead: Ask your real estate agent to help you track down neighborhood crime stats and school ratings. Measure the drive from the neighborhood to your job to gauge commuting time and proximity to public transportation. Visit the neighborhood at different times to get a sense of traffic, neighbor interactions and the overall vibe to see if it’s an area that appeals to you.

8. Making decisions based on emotion

Buying a house is a major life milestone. It’s a place where you’ll make memories, create a space that’s truly yours, and put down roots. It’s easy to get too attached and make emotional decisions, so remember that you’re also making one of the largest investments of your life, says Ralph DiBugnara, president of Home Qualified in New York City.

“With this being a strong seller’s market, a lot of first-time buyers are bidding over what they are comfortable with because it is taking them longer than usual to find homes,” DiBugnara says.

How this affects you: Emotional decisions could lead to overpaying for a home and stretching your budget beyond your means.

What to do instead: “Have a budget and stick to it,” DiBugnara says. “Don’t become emotionally attached to a home that is not yours.”

9. Assuming you need a 20 percent down payment

The long-held belief that you must put 20 percent down payment is a myth. While a 20 percent down payment does help you avoid paying private mortgage insurance, many buyers today don’t want (or can’t) put down that much money. In fact, the median down payment on a home is 13 percent, according to the National Association of Realtors.

How this affects you: Delaying your home purchase to save up 20 percent could take years, and you could limit cash flow that could be put to better use maximizing your retirement savings, adding to your emergency fund or paying down high-interest debt.

What to do instead: Consider other mortgage options. You can put as little as 3 percent down for a conventional mortgage (note: you’ll pay mortgage insurance). Some government-insured loans require 3.5 percent down or zero down, in some cases. Plus, check with your local or state housing programs to see if you qualify for housing assistance programs designed for first-time buyers.

10. Waiting for the ‘unicorn’

Unicorns do not exist in real estate, and finding the perfect property is like finding a needle in a haystack. Looking for perfection can narrow your choices too much, and you might pass over solid contenders in the hopes that something better will come along. But this type of thinking can sabotage your search, says James D’Astice, a real estate agent with Compass in Chicago.

How this affects you: Looking for perfection might limit your real estate search or lead to you overpaying for a home. It can also take longer to find a home.

What to do instead: Keep an open mind about what’s on the market and be willing to put in some sweat equity, DiBugnara says. Some loan programs let you roll the cost of repairs into your mortgage, too, he adds.

11. Overlooking FHA, VA and USDA loans

First-time buyers might be cash-strapped in this environment of rising home prices. And if you have little saved for a down payment or your credit isn’t stellar, you might have a hard time qualifying for a conventional loan.

How this affects you: You might assume you have no financing options and delay your home search.

What to do instead: Look into one of the three government-insured loan programs backed by the Federal Housing Administration (FHA loans), U.S. Department of Veterans Affairs (VA loans) and U.S Department of Agriculture (USDA loans). Here’s a brief overview of each:

FHA loans require just 3.5 percent down with a minimum 580 credit score. FHA loans can fill the gap for borrowers who don’t have top-notch credit or little money saved up. The major drawback to these loans, though, is mandatory mortgage insurance, paid both annually and upfront at closing.

VA loans are backed by the VA for eligible active-duty and veteran military service members and their spouses. These loans don’t require a down payment, but some borrowers may pay a funding fee. VA loans are offered through private lenders, and come with a cap on lender fees to keep borrowing costs affordable.

USDA loans help moderate- to low-income borrowers buy homes in rural areas. You must purchase a home in a USDA-eligible area and meet certain income limits to qualify. Some USDA loans do not require a down payment for eligible borrowers with low incomes.

12. Miscalculating the hidden costs of homeownership

If you had sticker shock from seeing your new monthly principal and interest payment, wait until you add up the other costs of owning a home. As a new homeowner, you’ll pay for property taxes, mortgage insurance, homeowners insurance, hazard insurance, repairs, maintenance and utilities, to name a few.

How this affects you: A Bankrate.com survey found that the average homeowner pays $2,000 annually on maintenance services. Not having enough cushion in your monthly budget — or a healthy rainy day fund — can quickly put you in the red if you’re not prepared.

What to do instead: Your agent or lender can help you crunch numbers on taxes, mortgage insurance and utility bills. Shop around for insurance coverage to get compare quotes. Finally, aim to set aside at least 1 percent to 3 percent of the home’s purchase price annually for repairs and maintenance expenses.

13. Not lining up gift money

Many loan programs allow you to use a gift from a family, friend, employer or charity toward your down payment. Not sorting who will provide this money and when, though, can throw a wrench into a loan approval.

How this affects you: “The time to confirm that the Bank of Mom and Dad is ready, willing and able to provide you with help for your down payment is before you start home shopping,” says Dana Scanlon, a Realtor with Keller Williams Capital Properties in Bethesda, Maryland. “If a buyer ratifies a contract to purchase a home with an understanding that they will be getting gift money, and the gift money fails to materialize, they can lose their earnest money deposit.”

What to do instead: Have a frank discussion with anyone who offers money as a gift toward your down payment about how much they are offering and when you’ll receive the money. Make a copy of the check or electronic transfer showing how and when the money traded hands from the gift donor to you. Lenders will verify this through bank statements and a signed gift letter.

14. Not negotiating a homebuyer rebate

The concept of homebuyer rebates, also known as commission rebates, is an obscure one to most first-time buyers. This is a rebate of up to 1 percent of the home’s sales price, and it comes out of the buyer agent’s commission, says Ben Mizes, founder and CEO of Clever Real Estate based in St. Louis.

How this affects you: Homebuyer rebates are available in most U.S. states, but not all. Ten states prohibit homebuyer rebates: Alaska, Alabama, Iowa, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Oregon and Tennessee.

What to do instead: If you live in a state that allows homebuyer rebates, see if your agent is willing to provide this rebate at closing. On a $300,000 home purchase, this can be a $3,000 savings for you so it’s worth asking.

Learn more:

First-Time Homebuyer Grants & Programs

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Shelling out big bucks for your first home, along with shopping for a mortgage, might seem daunting. Luckily, though, there are numerous first-time homebuyer programs and grants that can help you get your foot in the homeownership door.

Here’s a look at 10 first-time homebuyer programs that are popular with rookie house hunters.

 

1. FHA loan – A loan insured by the Federal Housing Administration that’s ideal for borrowers with lower credit scores or little money saved up for a down payment.
2. USDA loan – A loan program guaranteed by the U.S. Department of Agriculture for lower-income borrowers in eligible rural areas.
3. VA loan – A loan backed by the U.S. Department of Veteran Affairs for military personnel, veterans and their families. VA loans have minimal closing costs, competitive rates and no down payment requirement, however, a funding fee is required for some borrowers.
4. Good Neighbor Next Door – A HUD program that provides housing aid — a discount of 50 percent on a home’s list price in revitalization areas — for law enforcement officers, firefighters, emergency medical technicians and pre-kindergarten through 12th-grade teachers.
5. Fannie Mae or Freddie Mac – Loans backed by Fannie Mae or Freddie Mac require 3 percent down for conventional mortgages making them ideal for first-time buyers who have strong credit but little savings for a down payment.
6. HomePath ReadyBuyer Program – A program that provides 3 percent in closing-cost assistance to first-time buyers who complete an educational course and purchase a foreclosed Fannie Mae property.
7. Energy-efficient mortgage – An EEM is backed by FHA or VA loan programs and allows borrowers to combine the cost of energy-efficient upgrades onto a primary loan upfront — all without a larger down payment.
8. FHA Section 203(k) – An FHA-backed loan that lets you borrow the funds needed to pay for home improvement projects and roll the costs into one loan with your primary mortgage.
9. Local first-time homebuyer programs and grants – Many states and cities offer first-time buyer programs and grants for down payment or closing cost assistance. These programs typically come with income restrictions and have to be repaid when you sell the home.
10. Native American Direct Loan – Backed by the VA, this program provides direct home loans to eligible Native American veterans to buy, renovate or build homes on federal trust land.

Here’s an in-depth look at each of these programs.

1. FHA loan

Pros

• Require lower credit score than conventional mortgages
• Low down payment requirement of 3.5 percent

Cons

• Requires upfront and annual mortgage insurance premiums
• Overall borrowing costs tend to be higher

Best for: Buyers with less-than-pristine credit and those who don’t have a large down payment.

If you’re not sitting on a pile of down payment cash and you have a spotty credit record, there’s a loan for that. Insured by the Federal Housing Administration, FHA loans typically come with smaller down payments and lower credit score requirements than most conventional loans. First-time homebuyers can buy a home with a minimum credit score of 580 and as little as 3.5 percent down, or a credit score of 500 to 579 with at least 10 percent down.

FHA loans have one big catch called mortgage insurance. You’ll pay an upfront premium and annual premiums, driving up your overall borrowing costs. Unlike homeowners insurance, this coverage doesn’t protect you; it protects the lender in case you default on the loan. It’s the price borrowers pay when they have less skin in the game.

Learn more about finding the best FHA lender for you.

2. USDA loan

Pros

• Requires a little to no down payment
• Can qualify with a lower FICO score (640 or higher)

Cons

• Borrower income is restricted to less than 115 percent of the median income for purchase area

Best for: Borrowers with lower or moderate incomes purchasing a home in a USDA-eligible rural area.

You may not know it, but the U.S. Department of Agriculture, or USDA, guarantees loans for some rural homes and you can get 100 percent financing. This doesn’t mean you have to buy a farm, shack up with livestock or live in the boondocks, but you do have to buy a home in a USDA-eligible area.

USDA loans also have income limits based on where you live, meaning they’re geared toward folks who earn lower to moderate incomes. Typically, you need a credit score of 640 or higher to qualify for a streamlined USDA loan. If your score falls short, you’ll have to provide extra documentation on your payment history to get a stamp of approval.

3. VA loan

Pros

• No down payment requirement, and funding fee can be rolled into loan
• Doesn’t require a minimum FICO score or private mortgage insurance

Cons

• Lenders may have their own minimum FICO score overlays

Best for: Active-duty military members, veterans and their spouses who are eligible for VA loan benefits.

Many U.S. military members (active duty and veterans) are eligible for loans backed by the U.S. Department of Veterans Affairs, or VA. VA loans are a sweet deal for eligible borrowers because they come with lower interest rates than most other loan types and require no down payment. A funding fee is required on VA loans, but that fee can be rolled into your loan costs and some service members may be exempt from paying it altogether.

Other VA loan perks include no PMI or minimum credit score. If you struggle making payments on the mortgage, the VA can negotiate with the lender on your behalf to take some stress from the equation.

4. Good Neighbor Next Door

Pros

• Deeply discounted home prices
• Can use with FHA, VA or conventional financing, or cash
• Can sell after 36 months and keep the profits

Cons

• Limited number of homes available for a limited timeframe
• Must live in property for 36 months
• Homes are sold “as-is” with no buyer’s warranty

Best for: Teachers, law enforcement, firefighters or emergency medical technicians who are looking for an affordable home.

The Good Neighbor Next Door program, sponsored by the U.S. Department of Housing and Urban Development, or HUD, provides housing aid for law enforcement officers, firefighters, emergency medical technicians and pre-kindergarten through 12th-grade teachers — the folks who help keep communities safe and well educated.

Through this program, you can receive a discount of 50 percent on a home’s listed price in regions known as “revitalization areas.” Using the program’s website, you can search for properties available in your state. You must commit to living in the home for at least 36 months so this may not be ideal if you plan to move sooner.

5. Fannie Mae or Freddie Mac

Pros

• Low down payment requirement of 3 percent
• Variety of loan terms available with fixed and adjustable rates
• Some programs allow a debt-to-income ratio, or DTI, of up to 50 percent

Cons

• Requires a minimum FICO score of 620
• Adheres to strict loan limits set by the government
• Private mortgage insurance is typically required with less than 20 percent down

Best for: Borrowers with strong credit and stable incomes who may not have a large down payment saved up.

The names might sound a bit kitschy, but Fannie Mae and Freddie Mac are government-sponsored entities that keep the U.S. mortgage market going strong. The GSEs, as they’re called for short (government-sponsored enterprises), each set borrowing guidelines for loans they’re willing to buy from conventional lenders on the secondary mortgage market.

Both programs require a minimum down payment of 3 percent. Homebuyers also need a minimum credit score of 620 (or higher, depending on the lender) and a relatively unblemished financial and credit history to qualify. Fannie Mae accepts a debt-to-income ratio as high as 50 percent in some cases. You’ll still pay for PMI because you’re putting less than 20 percent down, but you can get it canceled once your loan-to-value ratio drops below 80 percent.

6. Fannie Mae’s HomePath ReadyBuyer Program

Pros

• Provides up to 3 percent in closing cost assistance for first-time buyers

Cons

• Selection of homes may be limited in your area
• Must complete an online first-time buyer education course before making an offer

Best for: First-time homebuyers who don’t have a lot of money for closing costs and don’t mind buying a foreclosed home.

Fannie Mae’s HomePath ReadyBuyer program is a little-known initiative geared toward first-time buyers interested in foreclosed homes that are owned by Fannie Mae. After taking a required online home-buying education course, eligible borrowers can receive up to 3 percent in closing cost assistance toward the purchase of a HomePath property. The trick is finding a HomePath property in your market, which might be a challenge since foreclosures account for a smaller chunk of listings today.

7. Energy-efficient mortgage (EEM)

Pros

• Can roll the cost of energy efficient improvements into a primary mortgage
• Insured by FHA or VA loan program
• Doesn’t require a larger down payment to add improvements into primary loan amount

Cons

• Loans may have dollar-amount caps on energy-efficient upgrades

Best for: Homebuyers who want to make their home more energy-efficient but don’t have the up-front cash for upgrades.

Making a home more energy efficient is good for the environment, and good for your wallet by lowering your utility bills. Making green upgrades can be costly, but you can get an energy-efficient mortgage, or EEM loan, that’s insured through the FHA or VA programs.

An EEM loan lets you tack the cost of energy-efficient upgrades (think new insulation, a more efficient HVAC system or double-paned windows) onto your primary loan upfront — all without a larger down payment.

8. FHA Section 203(k)

Pros

• Allows you to roll cost of renovations into your primary mortgage
• Home’s value is calculated is based on its improved value
• Low down payment requirement of 3.5 percent

Cons

• Improvements must cost more than $5,000
• May pay a higher interest rate to roll rehab costs into loan

Best for: Homebuyers interested in purchasing a fixer-upper but who don’t have a lot of cash to make major home improvements.

If you’re brave enough to take on a fixer upper but don’t have the extra money to pay for renovations, an FHA Section 203(k) loan is worth a look.

Backed by the FHA, the loan calculates the home’s value after improvements have been made. You can then borrow the funds needed to pay for home improvement projects and roll the costs into one loan with your primary loan amount. You’ll need a down payment of at least 3.5 percent, and improvements must cost more than $5,000.

9. Local first-time homebuyer programs and grants

Pros

• Offers down payment and closing cost assistance to bridge gap in cash savings
• Loans come with low or zero interest rates

Cons

• Income limits typically apply, depending on the program
• Some loans have to be repaid when you sell the home

Best for: First-time homebuyers who need closing cost or down payment assistance.

In an effort to attract new residents, many states and cities offer first-time homebuyer grants and programs. The aid comes in the form grants that don’t have to be repaid or low-interest loans with deferred repayment to cover down payment or closing costs. Some programs may have income limits, too. Before buying a home, check your state’s housing authority website for more information.

Contact a real estate agent or local HUD-approved housing counseling agency to learn more about first-time homebuyer loans in your area.

10. Native American Direct Loan

Pros

• No down payment or PMI required
• Low closing costs and interest rate

Cons

• Maximum loan limits apply depending on the area
• Property selection may be limited

Best for: Eligible Native American veterans wishing to buy a home on federal trust land.

The Native American Direct Loan provides financing to eligible Native American veterans to buy, improve or build a home on federal trust land. This loan differs from traditional VA loans in that the VA is the mortgage lender.

The NADL has no down payment or private insurance requirements, and closing costs are low. Borrowers are required to pay a minimal funding fee of 1.25 percent to the VA. The VA states on its website that borrowers typically pay a 4.75 percent interest rate but that can change with market conditions. Maximum loan limits apply.

First-Time Home Buyer Programs by State: