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Feb 2018

Down Payment Strategies for First-Time Homebuyers

Planning to buy your first home? Chances are, you have plenty of questions running through your mind – one of which may be related to the amount of cash you’ll need to have on hand. While you can expect the bulk of your mortgage costs to come in the form of monthly installments, you’ll also need to prepare to fork over a down payment on closing day.

What is a down payment?

A down payment is a percentage of the mortgage loan amount that is paid up-front to the lender when purchasing a home. The amount of the down payment and if it is required or not, will depend on the loan program.

The purpose of a down payment is to mitigate some of the risk that the lender takes on when they give you a home loan.

Putting down a chunk of your own money incentivizes you to stay current on your mortgage payments or risk losing the down payment amount if your home were to end up in foreclosure. Not to mention, putting cash down means you begin building equity in your new home right away.

How much do I need to put down on a home?

A great benefit of buying a home nowadays is the number of options you have when choosing a mortgage loan. You’ve probably heard of the 20% down payment on a conventional loan, but did you know there are other loan programs that offer low and no down payment options? It’s possible to buy a home, even with a smaller down payment. Read on for several alternative options for pulling together a down payment on your new home.

1. Consider an FHA loan

As we mentioned above, it’s possible to buy a home and put down less than 20%. If you choose a Federal Housing Administration (FHA) loan, you have the option to put down as little as 3.5% of the purchase price on your new home. This loan program not only offers a lower down payment solution, but the criteria to qualify is generally less restrictive.

2. Take out a VA loan

If you’re a veteran, active duty member or a surviving family member, you may qualify for a Veteran’s Administration (VA) loan. There is a very big perk to this type of loan – no down payment is required and no private mortgage insurance, although a VA guarantee fee does exist.

There is a specific set of requirements and eligibility for taking out a VA loan, so set aside some time to research and meet with a lender to make sure it’s the right option for you.

3. Accept a down payment gift

Don’t have much cash saved up but still want to buy a home? If you have willing family members, they can gift you a down payment. The donor must provide a written letter showing that the money is a gift, that no repayment is required, and the gift must be verified funds, like a cashier’s check or money order.

Essentially, a lender wants to ensure the monetary gift is truly a gift – not something that the family member will expect you to repay after purchasing the home.

4. Use retirement funds

If you’ve been saving up for retirement for a while, you may have a decent amount of money set aside in your 401k. If you’re comfortable with the idea of borrowing from this account, contact your 401k plan administrator for the specifics. It’s important to know that this is a loan and you’ll be required to repay the total amount toward your 401k and there are usually tax penalties for withdrawing funds pre-retirement. While this down payment option may not be the best option overall, it may work for your situation in a pinch.

5. Tap into down payment assistance programs

There are several programs in place at the local and state level for low-to-middle income buyers that help make new homes more affordable. In fact, some of these programs are even available to prior homeowners. Keep in mind, many of these programs are government-based, so there are a number of requirements to qualify for this type of assistance. It’s certainly worth looking into, though, if it can help you afford a new home!

6. Start saving up

There are many avenues you can pursue when it comes to affording your down payment, but the best one by far is to simply save money. It may seem intimidating, but you can start small. Here are a few tips to help you get started:

  • Put your tax refund directly into your savings account.

  • Set up a weekly or monthly automatic transfer from your checking account to your savings account.

  • Deposit your annual bonus into savings.

  • Take advantage of cash back credit cards (but of course, pay the balance off monthly).

  • Use a service that allows you to round up your purchases to the next dollar, and have the change go into your savings account.

  • Cut out frivolous purchases, such as a daily latte habit or eating lunch out every day. Make coffee at home and pack your lunch – the savings will add up quickly!

With a little patience and planning, homeownership will be within your reach before you know it by using one or more of these down payment strategies. Looking for more mortgage-related info?