Down Payment Strategies for First-Time Home Buyers
The idea of buying a first home is exciting. However, coming up with a sizable down payment can feel like an impossible task.
That is especially true when many lenders desire 20 percent or more as a down payment. According to the National Association of Realtors, the median home price in the U.S. is $391,200.Putting together a 20 percent down payment for even an average-priced home would require substantial savings. Fortunately, there are other options available to help people get the home they are dreaming of calling their own.
SouthState Buyer’s Advantage LoanOne specific option offered by SouthState is the Buyer’s Advantage loan program. Through this program, qualified borrowers are not required to pay a down payment and are able to receive up to 100 percent financing. Additionally, no PMI is required.
Government-backed MortgagesThere are also quite a few government-secured loans available that offer lower down payment options to consumers. They can help make the home-buying process more achievable for the average family. Three government-funded programs that offer consumers the option of a lower down payment include:
The VA offers loans to veterans meeting specific service requirements. These loans have limited closing costs, competitively low interest rates, and grant the ability to purchase a home with no money down.
Veterans Association (VA) Loans:
The FHA offers government-backed mortgages allowing qualified borrowers to get into a home for as little as 3.5 percent down.
USDA LoansThe USDA offers loans to qualified borrowers to purchase homes in designated rural areas with no down payment required.
Some borrowers may also qualify for a conventional loan that allows them to purchase a home with as little as three percent down if they have a sufficiently good credit score. Conventional loans are not government-backed loans and often require borrowers meet more stringent credit standards than government-backed loans.
These lower down payment loans allow you to purchase a home sooner, if you are struggling to save, though there are a few drawbacks to consider before choosing this route as part of your down payment strategy.
- Private Mortgage Insurance (PMI)
- Higher Interest Rates
PMI is a type of insurance specifically designed for conventional mortgages. Its purpose is to protect lenders from defaults if you are unable to make your monthly payments. With many traditional mortgages, you can ask to cancel your PMI once you’ve reached 20 percent equity in your home.
For FHA loans, the mortgage insurance premium (MIP) is something you will pay for the life of the loan. Many borrowers consider it a small price to pay for the benefit of homeownership years sooner, in many cases, than would have been possible otherwise.
Sources of Down Payment FundsDepending on the lender, you have a wide range of options when coming up with the down payment funds you need to buy your home. Ideally, it would come from savings, but with housing prices on the rise, more people need help to make more substantial down payments. For most loan programs you can use any of the following resources to fund your down payment:
- Cash savings
- Money gifted by friends and family
- Borrow or withdraw from your 401(k)
Available Assistance ProgramsIn addition to low down payment loans, there are assistance programs that can help you secure the down payment required by the lender. Many of these programs occur on state and local levels combining grants, zero-interest loans, and a combination of tax benefits and low interest rates.
The downside of the state and local down payment assistance programs often involve things like limited availability, maximum sales prices, and income limits for borrowers. There are also programs available through non-profit organizations, employers, community foundations, and other resources that can assist you in making your down payment.
TakeawayIdeally, you will have 20 percent to put down on the home you intend to buy. That isn’t always possible in today’s crowded and competitive real estate marketplace or if you are a first-time homebuyer. If you are unable to save considerable sums of money to make a down payment, there may be loan options and assistance programs available to help. They include federal government-backed loans, bank loan programs, state and local down payment assistance programs
To discuss and determine the right product for you, contact one of our Mortgage Bankers.