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03.26.20

First-Time Homebuyer Down Payment Strategies

How Can I Get Money for a Down Payment on a House?

When deciding to buy your first home, there are two important factors you need to address right off the bat. One, can I afford the monthly payment? Two, how much do I need to put down on a home?

For most first-time homebuyers, the tougher of the two questions is the down payment.

You might be asking, is there down payment assistance for first-time homebuyers? Yes. In fact, there are a lot of options, programs and loan types.

Can you use multiple down payment assistance programs? Yes again, although it depends on what programs you hope to bundle. For example, you can combine a family gift with a low down payment loan.

If you qualify for a VA loan, you won’t need a down payment. But almost every other loan type, including an FHA loan, will require you to make a down payment.

Some first-time buyers may qualify for down payments as low as 3%. But it’s more common to find down payment requirements of 10% or more. Fortunately, there are first-time homebuyer down payment assistance programs and helpful tips that can make things easier.

How can I get money for a down payment on a house? Let’s start exploring the options.

These are the most common options to afford the down payment on your first home. We suggest working with an experienced loan officer to help you understand your options.

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Family Gifts or Loans for Your Down Payment

A good portion of first-time buyers will have a family member help cover the cost of the down payment, or provide a loan so you can afford the cost.

Know this: having a family member cover a portion of the down payment is not as simple as it seems.

While it would be nice if they could just cut you a check, the lender will require more than their check. The lender will also need to verify that this was indeed a gift and that your family member has the financial means to make this gift. To do this, your family member will need to provide bank statements as well as a letter confirming the money is a gift and not a loan.

If any money from a family member is a loan that you are required to pay it back, it is considered an outstanding debt and the lender needs to know about that too.

You should also be aware of this. Using a gift to cover the entire down payment can be a red flag for some lenders. Historically, first-time homebuyers who used a gift to cover the down payment have a higher default rate than those that used their own money to cover a portion of the down payment.

Crowdfunding Your Down Payment

If your family can’t gift or loan you enough money, there is an opportunity for friends, coworkers and associates to help with your down payment.

The internet truly has a site for everything, including sites such as FeatherTheNest.com and HomeFundIt.com that can help you raise funds to cover all or a portion of your down payment. These sites operate somewhat like a gift registry, where people donate cash to help you begin a new chapter of your life.

But be aware, any donations to the FeatherTheNest.com are charged a 7.9% credit card processing fee plus 30 cents per donation. That means a $100 donation would cost the giver $108.20.

HomeFundIt.com actually provides an opportunity to earn $1,500 toward your closing costs if you partake in free homebuyer education courses. Money plus knowledge — we’d call that a win-win. Unlike FeatherThe Nest.com, HomeFundIt.com is offered by CMG Financial, a mortgage banking firm. So any money acquired through that site must be used with a CMG loan program.

Low Down Payment Loan Programs

You can find loans available for first-time homebuyers that have low or no down payment requirements.

No Down Payment Loan Options for First-Time Homebuyers

If you are a former military member, active military member or a spouse of a deceased military member, you can qualify for a VA loan. It’s one of the best loan programs available as it allows you to purchase a home with no down payment. But VA loans are not your only no down payment option.

A USDA loan, backed by the Department of Agriculture, is another no down payment loan option. And while the name may suggest otherwise, these loans are not exclusive to farmers. A USDA loan can be used in homes in rural areas, be it a farm or just a home.

Low Down Payment Government Loan Programs

If you don’t qualify for either a VA loan or a USDA loan, your next best option is to explore an FHA loan backed by the Department of Housing and Urban Development. With an FHA loan, your down payment will depend on a variety of factors, but it can be as low as 3.5%, making it a very attractive and affordable option.

For a little perspective, the median U.S. home price for 2020 is projected to be $270,400. If you qualified for a 3.5% down payment, you need to have $9,464 to cover the down payment. And yes, there will be other fees involved, so it’s best to talk with a loan officer or to use a down payment calculator to get a more accurate expectation of the cost.

Conventional Loan Options with Low Down Payments

You don’t need to have a military affiliation, be moving to a rural area or have a history of bad credit to qualify for a low down payment loan program. If you have a stable financial past and good credit score, you may be able to qualify for a conventional loan with a down payment rate as low as 3%. Of course, the exact rate will depend on your situation, but a conventional loan is considered the most attractive option (outside of a cash offer) for a seller looking at multiple bids.

The Down Side of Low Down Payment Loans for First-Time Homebuyers

Hooray, you saved thousands of dollars upfront by finding a low or no down payment loan for your first home purchase. You’re thinking you beat the game — and in a way you have — but as they say in Vegas, the house almost always wins.

In most situations, making a smaller down payment will cause other fees to enter the equation. The most common of these fees is mortgage insurance. It protects lenders against defaults on all FHA loans and conventional loans and typically stays in place until the borrower has 20% equity in a home.

A VA loan does not require any mortgage insurance but does have a “funding fee,” that is rolled into the monthly payments. While this fee is regulated and much less than mortgage insurance, it’s still another cost to consider.

Lastly, the greater your down payment, the lower your interest rate. And that rate difference can add up to a lot of money over a 15- or 30-year loan — a number that far exceeds the money saved upfront. So, it’s always advisable to put as much as you can toward the initial down payment. You’ll benefit over the long term. That said, don’t allow “having enough” to paralyze you. Work with a loan officer, run the numbers and together you can decide when the time is right to purchase your first home.

State and Local First-Time Homebuyer Down Payment Programs

The federal government isn’t the only group trying to help first-time homebuyers with their down payments. Many state and local governments, nonprofit foundations and even some employers offer programs as well.

Can I get a grant for a down payment on a house? In some cases, yes. Typically, the programs involve some form of zero interest or low down payment options, but they can also be in the form of a grant or a tax break.

In these cases, there are often additional requirements involved, such as needing to live at a property for a set number of months or a requirement to do some form of renovation to the home. You may also face income limits, credit score requirements or max home prices.

Finding these types of programs is not always easy. Our best advice is to work with a local loan officer. It’s their role to know all of the options available in an area and get you paired with the right choice.

Retirement Fund Withdrawal or Loan

The last option is perhaps our least favorite. In some situations, first-time homebuyers are able to withdraw money from a retirement account. Of course, there are rules regarding this depending on your age and the type of retirement program. Why don’t we suggest this option? Because retirement plans are designed to fund you later in life. While that can seem far off, it takes a long and steady path of saving to prepare you for life after work. Still, it is an option and maybe the right choice in your situation.

Employer-Sponsored 401(k) Plan

Your 401(k) plan may allow for early withdrawals or loans. You’ll pay income taxes and an additional 10% tax penalty on an early withdrawal. If your plan allows a loan, you must repay the money with interest to avoid income taxes and a penalty. Some 401(k) plans give you more than five years to repay a loan for a primary home. If you leave your job, loans must be repaid or rolled into an eligible retirement account by the next tax filing deadline, or you’ll pay taxes and a penalty on the borrowed money.

Traditional IRA

You can make withdrawals for first-time home purchases up to $10,000. You will pay income taxes on the withdrawn money but won’t face an additional penalty if the money is used to buy or build a first home.

Roth IRA

Withdrawals are tax-free and without penalty for a first-time home purchase if you’ve had the account for at least five years.

Find Your First-Time Homebuyer Down Payment Plan

Options are good. But too many options can be confusing. When it comes to finding the best options for affording a down payment for first-time homebuyers, connect with a Summit Mortgage Corporation loan officer. They have the answers that can guide you home.

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