Down Payment Strategies for First-Time Home Buyers

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Down Payment Strategies for First-Time Home Buyers

The idea of buying a first home is exciting. However, coming up with a size-able down payment can be a challenge. Especially since 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, was $229,600.

Putting together a 20 percent down payment for that home would require substantial savings. Fortunately, there are many options available to help people make the necessary down payment to get the home of your dreams.

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 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. Conventional 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 things to know and 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.

Potential Sources of Down Payment Funds

Depending on your situation, you may have a variety of potential options available to help with obtaining the funds needed for the down payment to buy your home. Ideally, it would be great for your down payment to come from savings, but with housing prices on the rise, more people need help to make more substantial down payments. Some examples of potential down payment sources include:

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

*Withdrawals from 401(k) may result in penalties, fees, and taxes needing to be paid - be sure to consult with your employer/401(k) provider prior to processing any withdrawals.

Available Assistance Programs

In addition to low down payment loans, there are assistance programs that can help you get the down payment you 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 may also be 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. If you are unable to make a 20 percent down payment, there are loan options and assistance programs geared to help. Research which program may be right for you to get into your dream home today.

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