Twenty percent for a down payment may not seem daunting until you realize that for a $200,000 house, you’d need to come up with $40,000 in cold hard cash! Not a lot of people I know have that kind of money just laying around - especially first time home buyers. But hope is not all lost.
There are several options to drop, reduce, and/or come up with your down payment.
The size of your required down payment varies by the loan program you use. Each program has different requirements, pricing, and guidelines - making it important for you to choose the one that fits your particular situation.
My favorite loan program is available to a select group of very special people. The VA loan program is for active duty and military veterans. This program will provide the borrower with 100 percent financing, meaning you don’t have to pay a penny towards a down payment. This is my favorite loan because it has the ability to get some of the lowest interest rates, the seller can pay the borrower’s closing costs, and there is no required private mortgage insurance. This loan can literally save the borrower thousands of dollars a year.
We also like USDA loans because they too offer 100 percent financing, but they come with their own unique guidelines and requirements. For example, to qualify, you have to buy a home in a rural area as defined by a map provided by USDA.gov.
Another great option is the FHA loan. With this loan you are required to put down as little as 3.5 percent. That’s a much smaller pill to swallow than paying 20 percent! This loan is for people who can be classified as “first-time homebuyers”, and it too has its own unique standards. One of the biggest drawbacks to the FHA loan program is the requirement to pay a monthly mortgage insurance for the life of the loan.
A fourth option is the conventional loan program. This is where people get the idea that you need to put 20 percent down in order to buy a home. The truth is that with the conventional program you can actually put down as little as 5 percent, but you’ll need to put down at least 20 percent to avoid the required private mortgage insurance.
Unfortunately not everyone can qualify for a VA loan and not everyone wants to live in a rural area. Many people then, will likely need to come up with some money for a down payment, and they may not be aware that you can get that money through a variety of ways.
Gifts - Many loan programs allow borrowers to receive funds from a family member in the form of a gift. There are limitations on this depending on the program and the percent of the down payment being gifted. It also needs to be documented using a “paper trail” to trace who, when, and how much money was given.
Retirement accounts - it’s often possible to borrow funds from a 401k or IRA. Obviously there may be tax penalties, interest charges, and it will likely count against your debt-to-income ratio. But many borrowers find this a good place to find money they’ve already stored away.
Savings - You can use any money that you have saved. One of the issues here is where the money came from. The term “mattress money” is used to describe funds that a borrower pulls from a location that can’t be traced such as a safe or shoe box. To avoid complications in the loan process, it is smart to keep money in a bank account where it is easily traced when used for a down payment.
When it comes to getting financing for a house, down payments can be a rough obstacle, especially for first time homebuyers. Hopefully you understand now that there are many different loan programs and acceptable sources for down payments. Now you just have to choose the right options and move forward.