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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, for Q3 2022, the median home price in the U.S. is $398,500.
Putting together a 20 percent down payment for even that average home would require substantial savings. Fortunately, just like you, there are options to help people make the necessary down payment to get the home you are dreaming of calling your own.
Quite a few government-secured loans are available that offer lower down payment options to consumers. They can help make the home-buying process more achievable for the average family. The three major low down payment loan programs available include:
Some borrowers may also qualify for conventional loans that allow them to purchase homes with as little as three percent down if they have sufficiently good credit scores. However, convention loans are not government-backed loans and often require higher credit scores than government-backed loans.
These lower down payment loans allow you to get into your home sooner, though there are a few drawbacks to consider before choosing this route as part of your down payment strategy.
Private mortgage insurance is specialized insurance designed explicitly for conventional mortgages. Its purpose is to protect lenders from defaults if you cannot make your monthly payments. With many traditional lenders, 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. However, 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.
Depending on the lender, you have a wide range of opportunities to develop the down payment funds you need to buy your home. Ideally, it would come from savings, but with housing prices rising, 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:
While the last one has significant drawbacks in the form of penalties, fees, and taxes (not to mention the loss of that lump sum from your retirement savings), it can be one of your best resources for down payment funding.
In addition to loan down payment loans, there are assistance programs that can help you get the down payment they need. Many of these occur on state and local levels combining substantial grants, zero-interest loans, and a combination of tax benefits and even lower interest rates.
The downside of the state and local down payment assistance programs often involves 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.
Ideally, you will have 20 percent to put down on the home you intend to buy. But, unfortunately, that isn’t always possible in today’s crowded and competitive real estate marketplace or if you are a first-time homebuyer. If you cannot save considerable sums of money to make a down payment, there are loan options and assistance programs geared to help. They include federal government-backed loans, state and local down payment assistance programs, friends, family, and your retirement fund. Use them wisely to get your dream home today.
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