When dreaming of owning a home, a lot of people get discouraged by the idea of saving enough money for the down payment. After all, the bigger the down payment the greater your buying options will be, but saving up any amount of money requires time and discipline. Let’s go over the basics of a down payment and then examine different sources of money that can help turn your down payment from an obstacle into an opportunity.
How Down Payments Work
A down payment, usually expressed as a percentage, is money you give the person selling the house and it comes from your own savings or a gift from a relative. Your down payment will be somewhere between 3% – 20%, varying based on the type of home you are purchasing and your credit and the loan product from the lender. This money serves as “skin in the game”, for the buyer to make timely mortgage payments minimizing the risk of foreclosure to the bank. For any down payments less than 20%, lenders will require you to obtain something called “Private Mortgage Insurance” (PMI).
If you were looking to purchase a home for $100,000 and put down 20%, that would mean you would need to save for a $20,000 down payment with a $80,000 mortgage and approximately 4% in closing costs or $4,000.00.
BUT, if you were able to put down 3% that would mean you would need to save $3,000 and obtain a $97,000 mortgage. Additionally, because your down payment is less than 20% you would be required to pay for Private Mortgage Insurance, which will raise your monthly payments.
Example: Let’s see how the size of a down payment can impact your monthly payments
(based on a 30 year/4% interest rate)
So, now that you know the basics of a down payment – how can you go about providing the percentage that will maximize your buying opportunity? There are a few methods to consider:
1.) Reduce Expenses and Save – Take a look at your monthly budget and find areas where you can make reductions and put that money into a savings. Small changes can have a big impact – begin packing lunches, lowering your monthly cable bill, carpooling when possible and reducing your entertainment spending can save you a few hundred dollars a month. Just by reducing your spending by $400 a month can save you $5000 in one year!
2.) Check with your Employer – Many areas offer special programs for certain professions – educators, medical personnel and first responders (police, EMTs and firefighters – to assist with the purchase of home. Additionally, some employers may offer relocation packages or homebuyer assistance to their new hires.
3.) A Matter of Circumstance – Similar to programs based on profession, there are programs designed specifically for individuals with a special circumstance or status, such as veterans or disabilities.
4.) It’s All Relative – there are mortgage programs that will allow a buyer to use “gift” money from a relative as a portion of your down payment. You will be required to provide proof that the money is indeed a gift, and not a loan, from a family member.
5.) A Loan from the Future – some individuals decide to borrow from their own retirement account (401k or IRA) to bolster their down payment power. It’s not the right option for everyone, but is worth exploring as an option.
6.) Go Local – Local municipalities operate programs to assist with down payment money for a variety of scenarios. Qualifications and requirements will vary – some programs are solely for first-time homeowners, others for low- to moderate-income buyers others simply require that you not own a home at the time of application.
Down Payment Assistance programs are an optimal way to achieve homeownership for many families across the county – and they don’t bring with them the potential to stress a family relationship, or impact an individual’s retirement plan – but learning about the availability and requirements for the various programs available wasn’t always an easy task. First a potential buyer would need to be aware of their existence and second; they would have to know where to look for information. Lastly, time would need to be dedicated to researching programs online and making calls to get a basic understanding of eligibility and requirements.
Not any longer – our passion for helping individuals in our own communities and across the country obtain the “American Dream” – led us to the creation of mortgagegrants.com. Now identifying available grants for down payment, or even closing costs, is as simple as entering in a few pieces of information for a customized report of local sources of assistance. This information can help you avoid the need for Private Mortgage Insurance and possibly make a significant portion of your loan interest free.