Acquiring the funds necessary to make your first home purchase can be quite a challenge. Maybe you are searching for a home with 3 bedrooms, 2 bathrooms, a garage, and maybe an extra room that you can use for a media room. Homes like that don’t come cheap! Saving up the “required” 20% down payment can be a mighty task. The fact is, many first-time home buyers will learn that they can obtain a mortgage with far less out of pocket money. Here are some options that could make getting into your first home just a little easier.
What is the Average Down Payment for a First-time Buyer?
While it is true that traditional lenders prefer 20% down, once the first-time buyer does some shopping around for a mortgage, they will find that they can reduce that down payment to 6% or less. Credit scores will go a long way in helping reduce many required down payments. With a credit score of 620, many first-timers may qualify for a down payment of only 3%.
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$300,000 home at 20% down =$60,000
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$300,000 home at 6% down =$18,000
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$300,000 home at 3% down =$9,000
Low Down Payment Mortgage Options
Many different low down payment options are available to first-time buyers. These are just a few of the options available. Talk to your M&M real estate agent for many more options:
VA Loans – from the Department of Veterans Affairs offer 0% down payment options.
USDA Loans – from the Department of Agriculture also offers 0% down payment options for those who qualify.
FHA Loans – from the Federal Housing Administration allow down payments as low as 3.5%.
Conventional Loans – for buyers with good credit, many lenders have down loan payment options as low as 3%.
State and Local Down Payment Assistance May Be Available
Many states and local agencies have down payment assistance programs. In California there are currently about 397 down payment assistance programs. These programs change from time to time and their availability also changes. Your M&M agent can provide more information on these various programs. These down payment assistance programs often are combined with tax breaks or special mortgage rates.
Gifts and Family Loans
Many first-time buyers use a monetary gift or loan from a family member or relative to reach their down payment goal. The giver may need to provide extra paperwork to satisfy lender requirements. If the money comes from a family loan, the terms of repayment will be figured into the buyer’s debt-to-income ratio.
Low Down Payment Drawbacks
For each down payment option there is always some type of drawback. Here are some of the drawbacks to consider:
Low Down Payment Mortgages – these may trigger the need for mortgage insurance. Mortgage insurance protects the lender against loan default. There may be lender funding fees that will increase your monthly loan payment. And sometimes a lower down payment can mean a slightly higher interest rate on the loan.
Down Payment Assistance Programs – these programs sometimes limit the maximum sale price, have income limits, and are sometimes limited to certain cities or areas within a city, state, or town.
Gifts/Family Loans – many lenders feel that if you don’t have any “skin in the game”, you may be more likely to default on your loan. Plus, if it is a loan, repayment of the loan must be figured in your debt-to-income ratio, which may affect the price of the home you can afford to buy.
Warning: Don’t Forget Closing Costs
Closing cost cover the cost of things like lender’s fees, appraisals, credit reports, title fees, etc. Usually you can count on closing fees to be 2% to 5% of the loan amount on top of your down payment. If you don’t budget for closing costs, having a portion of it taken out of your down payment could reduce the amount of your actual down payment.
Final Thoughts
There are many different down payment options for first-time buyers. One more thing to consider is timing. While you may think it would be smart to save a little longer to get a larger down payment, the cost of home ownership is on the rise. The best option may be to use one of these lower down payment options to literally “get your foot” in the door now, before prices rise beyond your reach. You can always refinance somewhere down the road.
