As their apartment rent increased each year, Zoe and Luis Martinez started thinking about buying a home. For a slightly higher amount each month, they could become homeowners. However, their student loan debt might be a barrier to obtaining a mortgage.

With limited funds, Zoe and Luis found some mortgages requiring only a 3 to 5 percent down payment. This financing choice would probably require mortgage insurance and could result in financial difficulties if housing prices decline. They must also consider closing costs and the real estate agent commission.

Zoe and Luis also discussed whether to use an online mortgage company or a local one. And then there’s the decision of a fixed-rate or adjustable-rate mortgage.

Several weeks later, after moving forward with their home purchase, Zoe and Luis were ready to close. Their Cape Cod–style home was previously owned by a sales manager who was transferred across the country. At the time the house went under contract, the home inspection and appraisal went smoothly. However, when Zoe and Luis arrived for the final walk-through, a few concerns surfaced: the lights on the lower level were flickering, and when the kitchen sink water was turned on, the water pressure was barely a trickle.

Estimates to repair those items were $1,800.

Questions

1. What are possible sources of down payment funds for Zoe and Luis?

2. If they obtained a mortgage with a very small down payment, what concerns might Zoe and Luis encounter?

3. How might Zoe and Luis address the problems they discovered at the final walk-through?

4. Based on this situation: 

(a) What budgeting and saving actions would you recommend to Zoe and Luis? 

(b) What lessons did you learn from their experience?