Down Payment Strategies for First-Time Home Buyers

Down Payment Strategies for First-Time Home Buyers

The idea of buying a first home is exciting. Coming up with a sizeable down payment, however, can feel like an insurmountable task. That is especially true when many lenders desire 20 percent or more as a down payment, and on August 2019, the average home price in the U.S., according to Zillow, is $229,600.

Putting together a 20 percent down payment for even that average home would require substantial savings. Fortunately, there are options to help people, just like you, make the necessary down payment to get the home you are dreaming of calling your own.

Low Down Payment Loans

There are quite a few government-secured loans available that offer lower down payment options to consumers. They can help make the home-buying process more achievable for the average family. The three major low down payment loan programs available include:

  • VA Loans. Offered by the Veteran’s Administration to veterans meeting specific service requirements. These loans allow veteran’s a more relaxed qualifying process considerably less paperwork, and the ability to purchase a home with no money down.
  • FHA Loans. These government-backed loans are offered through the Federal Housing Administration and allow borrowers to get into their homes for as little as 3.5 percent down.
  • USDA Loans. These loans are available in certain rural areas across the country and allow qualifying borrowers to purchase homes in these designated areas for as little as zero down payment.

Some borrowers may also qualify for conventional loans that allow them to purchase homes with as little as three percent down if they have sufficiently good credit scores. Convention loans are not government-backed loans and often require higher credit scores than government-backed loans.

These lower down payment loans allow you to get into your home sooner, though there are a few drawbacks to consider before choosing this route as part of your down payment strategy.

  1. Mortgage Insurance
  2. Higher Interest Rates

Private mortgage insurance is a specialized type of insurance specifically designed for conventional mortgages. Its purpose is to protect lenders from defaults if you are unable to make your monthly payments. With many traditional lenders, you can ask to cancel your PMI once you’ve reached 20 percent equity in your home.

For FHA loans, the mortgage insurance premium (MIP) is something you will pay for the life of the loan. Many borrowers consider it a small price to pay for the benefit of homeownership years sooner, in many cases, than would have been possible otherwise.

Sources of Down Payment Funds

Depending on the lender, you have a wide range of opportunities to come up with the down payment funds you need to buy your home. Ideally, it would come from savings, but with housing prices on the rise, more people need help to make more substantial down payments. For most loan programs you can use any of the following resources to fund your down payment:

  1. Cash savings
  2. Money borrowed from or gifted by friends and family
  3. Borrow or withdraw from your 401(k)

While the last one has significant drawbacks in the form of penalties, fees, and taxes (not to mention the loss of that lump sum from your retirement savings), it can be one of your best resources for down payment funding.

Available Assistance Programs

In addition to loan down payment loans, there are assistance programs that can help you get the down payment they need. Many of these occur on state and local levels combining actual grants, zero-interest loans, and a combination of tax benefits and even lower interest rates.

The downside of the state and local down payment assistance programs often involve things like limited availability, maximum sales prices, and income limits for borrowers.

There are also programs available through non-profit organizations, employers, community foundations, and other resources that can assist you in making your down payment.

Takeaway

Ideally, you will have 20 percent to put down on the home you intend to buy. That isn’t always possible in today’s crowded and competitive real estate marketplace or if you are a first-time homebuyer. If you are unable to save considerable sums of money to make a down payment, there are loan options and assistance programs geared to help. They include federal government-backed loans, state and local down payment assistance programs, friends, family, and your retirement fund. Use them wisely to get your dream home today.