First Time Homebuyers: How much You Really Need For Down Payment
Buying a house for the first time comes with its own unique challenges. You might only be a few years into your career; still paying off student loans; and probably won’t have as much money saved as you would like. Having no experience with the process of buying a home doesn’t help either.
The National Association of Realtors estimates that a third of homes are bought by first-time buyers. This is a historically low rate. With all the options available now such as no- and low-down payment mortgages, there’s really never been a better time to become a first-time home owner.
One of the main factors to consider when getting a mortgage is the down payment.
What A “Down payment” really means
As with most items, you can choose whether to pay for a home with money in your bank account, or on credit. In some situations, the banks will lend the entire amount needed to buy the house. This is called 100% financing.
In most situations, you pay part of the house’s asking price and the bank pays the rest. That money that came from your own bank account is called the “down payment”. Let’s say you want to buy a house for $100,000 with a 10% down payment. You would need to pay $10,000 from your savings while the bank will lend you the remaining $90,000. If you had more savings, you can decide to put down 20% as a down payment, in which case you would pay $20,000. But if you qualify your 100% financing your down payment is 0% or $0.00.
Whatever choice you make will have its benefits and drawbacks. For instance, a larger down payment will mean lower monthly payments in the future since you’ll need to borrow less money from your lender. Your mortgage rate could also be lower as a result of this. A smaller down payment on the other hand means more cash on hand in the short-run. You’ll also be able to buy your dream home sooner since you won’t have to save for such a long time.
How Big Does The Down Payment Need To Be?
There are many different mortgage loan options available to first-time home buyers. The final loan can be adjusted to fit your needs. The size of your down payment is one of the major adjustments and that final amount is really up to you. Each lender will have a minimum requirement, but you can choose your lender based on what you can afford, or save up at the time. Some of the most-used no- and low-down payment mortgages gotten by first time buyers include the HomeReady™ mortgage, the FHA loan, the Conventional 97, the VA loan, the USDA loan and WHEDA loan.
We’ve provided a short description of each of them below:
The HomeReady™ Mortgage
This program targets multi-generational households, but is open to other types of buyers. It’s a 3% down payment program. Buyers in the HomeReady™ program are given access to discounted mortgage rates. They are also allowed to use the income of other residents and boarders to become mortgage-qualified.
These loans have a minimum down payment of just 3.5% of the total price of the house. They are a common choice for people buying a home for the first time because they accept low-average credit scores and have no special requirements.
The Conventional 97
This is program requires a higher than average credit score, but only requires a 3% down payment. The Conventional 97 loan offers cash gifts to buyers when they put down their down payment.
The VA Loan
The Veterans Affairs Loan is available to all veterans and current members of the U.S. military. These loans do offer a 100% financing option and often have the lowest mortgage rates when compared to other low-down payment loans.
The USDA Loan
100% financing is possible with these loans. If you are looking to buy a house in a rural area, or a less-dense suburban neighborhood, then it could be a great fit for you. The USDA rates can be as low as VA rates.
The WHEDA Loan
WHEDA stands for Wisconin’s Housing and Economic Development Authority. 100% financing is possible with this loan through a combination of two loans that total your purchase price. They follow the lending rules of FHA, Fannie Mae or Freddie Mac for the 1st loan and the second loan is a WHEDA loan. These loans what we call overlays. An overlay is when a lending rule is made tougher by a lender. For instance there is a max income limit for this loan. It is pretty generous though!
Other Down Payment Assistance Programs
One of the biggest challenges for first-time home buyers is making the down payment. In addition to the low-down payment options listed, there are widely-available down payment assistance programs (DPA) that offer grants instead of grants and don’t require repayment in the same way as standard loans.
RealtyTrac conducted a study showing that there are over 75 million single-family households in the U.S. Of those, 87% can qualify for a DPA program. These programs will help lower the amount of cash you need as well as you monthly repayments later on. Even with these incredible benefits, fewer than 10% of first-time buyers apply for DPA. Most people are unaware that they exist and unaware of the requirements.
Now that you know, you can talk to your lender to see which program will suit you best.
Find out how much down-payment you need, plus how much you qualify for by contacting me for a free conversation about these programs.