Is a down payment the only thing keeping you from purchasing a home?
For many young or first-time buyers, the thought of coming up with 20% to put down on a home is daunting. When you don't have equity from an existing home's sale to help improve your down payment amount, you are forced to save the entire amount. But before you assume that you have no option but to come up with 20% before entering the home buying market, you should know that there are other options available to you. Here are some of them.
Low Down Payment Loan Options
The first place to look is with some of the many low down payment loan options available for you. It's actually no longer true that you have to have a 20% down payment to buy a home. For first-time buyers especially, quite a number of programs are available to help you get past this hurdle.
The first place to look is with government-backed loans. Government-backed loans are guaranteed, at least in part, by a government agency, such as the Federal Housing Administration, USDA, or the VA. By purchasing a home using one of these loans, you put the lender at less risk, and thus the lender is willing to take on a loan with less down payment.
The FHA-backed loans allow you to pay as little as 3.5% down. You will have to pay mortgage insurance, but you won't need 20% down. If you or your spouse is a qualified service member or veteran, you can get a home for no down payment at all through the VA home loan program. While you pay a funding fee, that fee can be rolled into your loan and isn't much. The USDA also allows those buying in non-city areas the option to buy with no money down through the USDA home loan program.
You can also get a conventional loan with less than 20% down if your credit is fairly good. Some lenders will offer loans for as little as 3% down, and a few will allow select borrowers to burrow the full cost of the home. Keep in mind that you will pay mortgage insurance in this case as well.
If you choose a loan program that requires mortgage insurance, you aren't necessarily stuck paying that amount for the life of the loan. You can ask for it to be removed or refinance the home when property values change and you no longer own more than 80% of the home's value. Also, certain loans will automatically drop the insurance after a set number of years.
Friends and Family
If you have trusted friends and family who have access to money, you may be able to set up a loan for the down payment amount. However, a loan, even if it's from family, needs to be documented, and your lender will ask for that documentation. It may change your debt-to-income ratio, which may lower your borrowing power. Still, this can be an effective way to get the money you need for a down payment.
If your friends and family wish to give you a gift, you will need documentation that the gift was, in fact, a gift, and that the giver had the money to make the donation. However, if you have friends and family willing to do this for you, the gift won't lower your borrowing power. That said, some lenders are hesitant to lend to customers who have no money at all of their own to put down. One of the reasons lenders ask for a down payment is the fact that it shows the borrower is disciplined enough to save money for a major purchase, and that shows financial stability.
Local or State Down Payment Assistance Programs
Every single state has some sort of a program to help first-time or low-income buyers get the money they need for their down payment. While making a list of these programs isn't possible because they change regularly, it can be an option for some homebuyers. It may be location specific or borrower specific, so you will want to talk to your potential lender or your real estate agent about the possibilities in your area. However, make sure you look into all of these possibilities before assuming you can't afford a down payment.
Kentucky: Kentucky Housing Corporation
Tennessee: Tennessee Housing Development Authority
As you can see, there are options for those who don't have the moony upfront for a 20% down payment. If you're ready to enter the home buying market, and don't think you can save quite enough for a down payment, you have options! Talk to your lender or your agent about those options, and start looking for your new home.
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