Thinking about buying a house? One of the top questions is “How much down payment do I need?”
While traditional thinking is that you need 20% of the estimated value of the home you intend to buy to put down, more than half of American home buyers put down much less. In fact, the average down payment on a home is only 11%, and 70% of first-time home buyers put down even less than that.
If you’ve been waiting and saving to buy a home, thinking you have to hit that magical 20% figure, you might want to readjust your thinking and start house hunting now. Interest rates have never been better, and you can save significantly on buying a home in the current market instead of continuing to pay rent. This is particularly true if you are making a home purchase for the first time.
Options for Lower Down Payments
You may be able to get a lender to agree to a lower than 20% down payment if you qualify for a specific type of loan program. These programs are set up specifically to ease the path to ownership for people who can afford a mortgage, but don’t have the savings to buy.
Loan programs with a <20% down payment
First-Time Homebuyers can put as little as 3% down with good credit through Fannie Mae and Freddie Mac’s HomeReady and Home Possible loan programs. Non First-Time Homebuyers can qualify for these programs as well provided they meet certain income limit restrictions.
Federal Housing Authority (FHA) loans allow you to buy a home with only 10% down. If you have a credit score of 580 or higher, you can qualify for a 3.5% down loan.
If you are a veteran or veteran spouse, you may qualify for a loan backed by the Department of Veteran Affairs (VA). You may be able to pay 0% down for your new home.
There are several other types of loan programs at federal and state level that can reduce your down payment. You may also qualify for a lower down payment if you have an exceptionally good credit score.
Lower down payments may require PMI
If your lender approves a loan for more than 80% of the value of the home, they’ll expect you to buy private mortgage insurance (PMI) to limit their risk. This insurance varies based on your credit and the LTV ratio.
You may have to pay the PMI up front, or you might pay a monthly payment. In many cases, once your equity passes 20% (making your loan 80% or less of the home value) you can get rid of the PMI requirement either by restructuring your loan or refinancing it.
Alternative Sources for a Down Payment
If you still are having trouble coming up with a down payment, you may need to think outside the box for funding. There are many alternative sources you can use to fund a down payment on your future home.
Whether you are looking at a down payment of 20% (commonly seen as traditional, although the average is only 11%), or an FHA down payment of 10% or 3.5%, coming up with a lump sum of cash for your down payment can be overwhelming. The costs of buying a home don’t stop there; you’ll also have closing costs and other expenses.
The bigger a down payment you can make, the lower your costs over the life of your loan will be. How can you come up with the cash? If your savings account is growing too slowly, consider these five options for funding your down payment:
A gift from a family member
Most mortgage programs will allow a percentage of your home purchase down payment to be funded with a “gift.” You’ll need to have received this gift or have access to the funds, and you’ll need a letter from the person who gifted you the money stating they gave it to you for the purpose of buying a home. When done properly, you can receive this money and pay it towards your down payment without incurring a tax penalty.
It’s important to note that the lender will require a Gift Letter stating that the money is a gift and not a loan and there is no expectation of repayment.
Down payment assistance programs
Federal down payment options are fairly cut and dried, but you may also be able to benefit from local assistance with your down payment in the form of a grant or specialized program. Ask your lender if you qualify for such a program, particularly if you are a first-time home buyer. If your down payment is less than 20%, expect to pay private mortgage insurance (PMI) to protect your lender.
This typically isn’t an ideal option, but you might be able to make an early withdrawal and pay no penalty if you are using it to fund a home purchase. Ask your loan officer if the type of loan you qualify for has this option, and discuss with your retirement fund manager how to go about tapping this resource without hurting your retirement plans.
If borrowing means you can put a full 20% down payment on a conventional home loan, you could potentially save so much in interest that you can effectively put all of that money and more back into retirement funds by the time your home is paid off.
Thinking about moving somewhere new? Find out if your employer will provide relocation expenses. This could help you come up with a down payment even if you’re still waiting for your current home to sell, and make your move that much smoother.
How to Save Money to Buy a House
Even if you qualify for a low down payment, you’ll still need to have some money saved up to buy a home. It can be demoralizing to see most of your paycheck go to rent each month while you stay far from home ownership. Here are four tips to help get you closer to your dream.
Automate your savings
Step one: open a new savings account specifically for saving for your new home. Direct a certain portion of your paycheck there every month. You can do this by splitting your direct deposit instructions, or by setting up an automatic transfer to happen a few days after your paycheck arrives every month. Look for a high-yield savings account so your money earns you interest.
Pay off your debt
Paying off high interest credit cards will improve your credit, lower your debt to income (DTI) ratio, and leave you sitting pretty with a higher level of income sooner than you think. Once your debt is paid, sock all of that monthly payment into your savings to grow with the rest of your down payment. You’ll be amazed how fast your savings can grow when your high interest debt is gone.
Get a side gig
A part-time, seasonal, remote worker or gig job can let you set your own hours and earn extra cash. Even if you only work a few hours a few days a week, or four month of each year, all of that money will go straight to growing your savings. Consider answering phones from home in a customer service or sales role, becoming a delivery driver, walking dogs, or freelancing to bank on a skill like graphic design or content writing.
Instead of spending money all month on everything you need and want, then saving the rest, make your savings account the most important bill to be paid. This “Pay yourself First: concept can ensure you reach your goals and don’t overspend on things that aren’t as important to you in the long run.
It’s simple. Decide how much money you can reasonably save per month. Pay that into your savings account first, before anything else. Then payu other important bills, like housing, utilities, monthly credit bills, and food. Whatever is left is your fun money – but when it’s gone, it’s gone. This will keep you from splurging on non-important things while you save for your new home.
One or more of these options can help you come up with the cash in hand you need to make your down payment and get into the home of your dreams.
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