Buying Your First Home: The Down Payment
First-time home buyers face a few hurdles as compared to other types of buyers.
A first-time home buyer may less money saved for a downpayment; may have a collection of student loans and other large debt; may be just starting a career; and may have less experience with the home-buying process.
A first-time home buyer may even be about to live on their own for the very first time.
According to the National Association of REALTORS®, first-time home buyers account for 1-in-3 homes sold nationwide. This is the lowest rate in close to 30 years.
Yet, with mortgage rates low and an abundance of low- and no-downpayment mortgages available from mortgage lenders, there’s never been a simpler time to get approved for your very first home loan.
This post discusses down payments; and, is the first of a four-part series meant to help first-time home buyers buy their first home and get approved for their first mortgage.
What Does It Mean To Make A “Downpayment”?
When you buy a home, you have the option of paying for it with cash from your bank account; or, with money you’ve borrowed from a bank.
Sometimes, a bank will lend you the entire amount you need to buy a home. This is known as 100% financing.
However, you may not want to borrow 100% of a home’s purchase price, or the bank may not allow it. The monies you pay from your own bank account is known as your “downpayment”.
As an illustration, if you purchased a home for $100,000 and wanted to make a ten percent downpayment, at closing, the bank would have $90,000 for you while the remaining $10,000 would be sourced from your savings.
As a home buyer, the size of your downpayment is up to you.
You can make a downpayment of twenty percent or more, or you can skip the downpayment altogether. Each choice has its benefits.
For example, when you make a large downpayment, you borrow less money from your lender which reduces your monthly mortgage payment.
You may also get access to lower mortgage rates.
When you make a small downpayment, you get the benefit keeping cash in your savings account for life’s emergencies. It also means that you can buy a home today instead of waiting 8 years to save for a downpayment.
How Much Downpayment Is Required To Buy A Home?
As a first-time home buyer, you have access to a wide range of mortgage loans and mortgage loans can be customized to meet a buyer’s needs.
The size of your downpayment is one such customization.
Your downpayment can be as large as you wish, or as small — so long as you make the minimum downpayment required by your lender.
The five most-common low- and no-downpayment mortgages used by first-time home buyers are the FHA loan, the VA loan, the USDA loan, the Conventional 97, and the HomeReady™ mortgage.
Each is described below.
The FHA Loan
FHA loans require a downpayment of 3.5% of a home’s purchase price, at minimum.
FHA loans are common among first-time home buyers because the program allows for below-average credit scores and there are no special qualifications.
FHA mortgage approval standards are considered to be the most-friendly toward first-time buyers.
The VA Loan
VA loans are available to members of the U.S. military and veterans of the Armed Services.
VA loans provide a 100% financing option, and VA mortgage rates are often the lowest as compared to other low- and no-downpayment mortgage loans.
The USDA Loan
USDA loans also allow for 100% financing. The program is available for homes in rural areas and less-dense suburban neighborhoods nationwide.
USDA mortgage rates are often as low as VA mortgage rates.
The Conventional 97
The Conventional 97 is a 3% downpayment program available to home buyers with above-average credit scores. The Conventional 97 loan allows buyers to receive cash gifts for their downpayment.
The program has a loan size limit of $417,000.
The HomeReady™ Mortgage
The HomeReady™ mortgage is another 3% downpayment program. The program is geared at multi-generational households, but all home buyers are welcome to apply.
Home buyers using HomeReady™ get access to discounted mortgage rates and can use the income of boarders and other household residents to help get mortgage-qualified.
Downpayment Assistance Programs Can Help, Too
First-time home buyers often cite “making a downpayment” as a primary obstacle to homeownership.
However, in addition to an abundance of low- and no-downpayment mortgages, first-time buyers have access to downpayment assistance programs (DPAs) — many of which “grant” money instead of requiring repayment.
And the programs are widely-available, too.
According to a study from housing data company RealtyTrac, there are 78 million single-family homes in the United States, including condominiums. 68 million — or 87% — of these homes potentially qualify for downpayment assistance.
As a first-time buyer, therefore, you can use downpayment assistance programs to help reduce your cash required at closing; and, to reduce your monthly mortgage payment.
Strangely, less than ten percent of home buyers even apply for downpayment assistance.
Home buyers often don’t apply for such programs because they’re unaware that the downpayment assistance programs exist, they don’t believe they’ll qualify, or they plain don’t know where to get access.
To find out for which assistance programs you may be eligible, talk to your mortgage lender. Most banks have applications on-hand for downpayment assistance programs, or can point you to a website.
The average downpayment assistance amounts to $11,565.