A down payment is the amount you pay upfront as a part of the total purchase price of a home. Most lenders require a borrower to put down a significant portion of the home buying cost at the time of closing. It becomes often difficult to manage such a high amount for a first time home buyer. As a result, there exist several state-sponsored or lender-backed down payment assistance programs and other options.
Lenders typically require you to pay down at least 20% of the cost of the home. For example, if you are buying a home priced at $150,000, you must have $30,000 in cash to pay down at closing. The lender will offer you a loan amount of $120,000 to cover the rest of the balance if you meet the lender’s underwriting guidelines.
Down Payment Options
You can still qualify for a mortgage if you don’t have enough savings to pay down 20% of the home purchase price.
With an FHA loan, you need only 3.5% as a down payment to close. However, you must pay for two insurance premiums – one upfront and the other every month known as Mortgage Insurance Premium (MIP).
Subject to your eligibility, you may be able to eliminate the need of a down payment with a VA or USDA loan. While the former is available to veterans of the armed forces, the latter makes home financing available to the residents of a rural area or those willing to buy a residential property in a rural area.
For conventional loan programs with no government backing, you must buy an insurance policy to protect the lender. This is known as Private Mortgage Insurance (PMI). You can shop for PMI for lower premiums, but it is usually added to the monthly payment, making your loan more expensive over the term of the loan. You can, however, have your lender remove it once the outstanding loan amount becomes less than 80% of the home value.
Down Payment Assistance Programs
Several down payment assistance programs are available across the nation. Borrowers may be offered a grant, a below-market first mortgage or a tax credit by a government-approved agency to comfortably meet their home-buying requirements.
It is possible to take an additional mortgage on the property you are going to buy. A second or third mortgage can help you meet the down payment requirements of the first mortgage. Note that you may have to pay a higher interest rate as this kind of loan is more risky for the lender. This is because the first mortgage must be paid before the second mortgage in case of a default.
If you have a hard time saving for a down payment, you can ask a friend or relative to throw in some money as a gift. Note that you must not have an obligation to pay it back. As evidence, you must have a gift letter, stating clearly that the donor doesn’t want the money back with or without interest.
Seller Take Back
This refers to an agreement where the buyer obtains second mortgage financing from the seller. This arrangement is possible in case of an assumed mortgage.
A rare case is sweat equity whereby you use labor to build or improve a property as part of the down payment.