Saving for a home down payment is a massive undertaking. Not only do you have to save up 10-20% of the home’s value, you also have to save for closing costs, and make sure you have enough left over in savings to prove to the bank you’re not going to end up destitute after you sign the paperwork.
While I’m not a big fan of subprime lending (who is anymore?) or taking out a loan you can’t afford (you’ll never build equity!) I am all about programs that can help people reach their goals faster and responsibly. Especially with the state of renting threatening to erode yet another rung in the ladder to the American Dream.
Here are four programs that can help with your home down payment or closing costs. Don’t use these programs to buy something you won’t be able to afford. But definitely use them to help mitigate costs that are prohibiting you from building wealth.
VA Loans
Who qualifies for a VA loan?
VA loans are loans for those who are currently serving or have served in the military. Widows of those who have died in the line of duty or from a disability incurred while in the line of duty can also qualify in some instances.
I’m all about programs that help out veterans and soldiers, but I do want to throw a word of caution out there with this one:
When you are buying with 0% down, your mortgage is going to be larger. You’re also starting with zero equity.
It’s imperative to be 100% sure you can afford your monthly payments. If you can, a VA loan can be a good vehicle to get you into a house. If you can’t, you could end up being house poor very quickly.
Can I use a VA loan to flip a house?
No. The house must meet certain criteria; you likely won’t be purchasing a foreclosure or something that needs a lot of fixing up before it is usable.
You’re also not allowed to use a VA loan to purchase properties that are purely real estate investments — you have to occupy at least some portion of the home.
First-Time Home Buyer Programs
First-time home buyer programs have slowed and decreased in benefit level since the Recession, but they do still exist.
Where can I find a first-time home buyer assistance program?
Most states provide a first-time home buyer program through the state housing financing association.
Some counties and municipalities provide additional programs. These hyper-local programs are typically for homes in areas they’re trying to revitalize, so you must buy within certain neighborhoods to get the assistance.
What are the benefits of a first-time home buyer program?
These programs offer a range of benefits which will vary from state to state, county to county, and city to city. They can include:
Second mortgages with 0% interest to fund closing costs.
Lower-interest mortgages.
FHA Loans
What is an FHA loan?
FHA loans are run through the Federal Housing Administration. With these loans, you only need 3.5% as a down payment, and you’re actually allowed to receive 100% of the funds as a gift from a relative.
What’s the catch with FHA loans?
The downsides to this are much akin to those of the VA Loan: You’re starting with less equity, and the size of your loan will be larger.
On top of that, FHA loans require you pay PMI. To compound things even further, PMI is more expensive on FHA loans than it would be on a traditional mortgage.
Should I use these home buyer assistance programs or not?
Your best bet is to save up enough to pay for everything yourself.
But if you’re in a situation where rent is keeping you from getting that down payment down payment together, you may want to look into these programs and specialized mortgages.
As long as you could afford monthly mortgage payments once the rent was gone, it’s worth at least running your own numbers to see how it would pan out for you in the long-term.
You can save for a house by using high-yield savings and CD deposit accounts, cutting back your spending elsewhere and looking for down payment matching programs. If those strategies aren't enough, you might also consider asking for a raise at work or even moving back home for a while to cut rent payments altogether.
You can save for a house by using high-yield savings and CD deposit accounts, cutting back your spending elsewhere and looking for down payment matching programs. If those strategies aren't enough, you might also consider asking for a raise at work or even moving back home for a while to cut rent payments altogether.
A down payment gift is money given by someone, usually a family member, to a homebuyer to help them afford a mortgage down payment or similar expenses like closing costs. To use gift money, you have to follow the rules imposed by the lender and/or government agency insuring the loan, if applicable.
A down payment is a sum a buyer pays upfront when purchasing a home or car and is a percentage of the total purchase price. The higher the down payment, the less the buyer will need to borrow to complete the transaction, the lower their monthly payments, and the less they'll pay in interest over the long term.
If you qualify, these can help you cover down payment and/or closing costs, typically in the form of grants and low-interest, deferred-payment or forgivable loans. Eligibility requirements and availability vary from one program to the next.
The short answer is: probably not. You likely won't find many options for a down payment loan — which is a personal loan that you use to make a down payment on a home. And those that do exist come with some drawbacks. Instead, you may have better luck looking for a mortgage that doesn't require a 20% down payment.
Key takeaways. You don't need to put 20 percent down to get a mortgage — some mortgages don't even require a down payment. You can get a conventional mortgage with 3 percent down, but with anything less than 20 percent, you'll have to pay mortgage insurance.
A gift letter is a statement that ensures your lender the money that came into your account is a gift and not a loan. The person who gave you the money must write and sign the gift letter as well as provide their personal information.
You'll usually need a credit score of at least 640 for the zero-down USDA loan program. VA loans with no money down usually require a minimum credit score of 580 to 620. Low-down-payment mortgages, including conforming loans and FHA loans, also require FICO scores of 580 to 620.
Generally speaking, you'll likely need a score of at least 620 — what's classified as a “fair” rating — to qualify with most lenders. With a Federal Housing Administration (FHA) loan, though, you might be able to get approved with a score as low as 500.
To purchase a $200,000 house, you need a down payment of at least $40,000 (20% of the home price) to avoid PMI on a conventional mortgage. If you're a first-time home buyer, you could save a smaller down payment of $10,000–20,000 (5–10%). But remember, that will drive up your monthly payment with PMI fees.
The minimum down payment required for an FHA loan is 3.5%. Keep in mind that you'll need a credit score of 580 or higher to be eligible for the 3.5% down payment. You'll have to put 10% down if you have a credit score of 500 – 579.
However, a smaller down payment means a more expensive mortgage over the long term. With less than 20 percent down on a house purchase, you will have a bigger loan and higher monthly payments. You'll likely also have to pay for mortgage insurance, which can be expensive.
Putting down this amount generally means you won't have to worry about private mortgage insurance (PMI), which eliminates one cost of home ownership. For a $400,000 home, a 20% down payment comes to $80,000. That means your loan is for $320,000.
The amount can be less if you buy a cheaper home or qualify for a lower mortgage rate, keeping your monthly loan payment lower. Aspiring buyers typically ask, “Is it best to put 20% down on a house?” This is a laudable goal as a minimum 20% down payment waives private mortgage insurance (PMI) on conventional loans.
To purchase a $200,000 house, you need a down payment of at least $40,000 (20% of the home price) to avoid PMI on a conventional mortgage. If you're a first-time home buyer, you could save a smaller down payment of $10,000–20,000 (5–10%). But remember, that will drive up your monthly payment with PMI fees.
Introduction: My name is Kimberely Baumbach CPA, I am a gorgeous, bright, charming, encouraging, zealous, lively, good person who loves writing and wants to share my knowledge and understanding with you.
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