The Down Payment
Many people put off buying their first home because they just can’t seem to save enough money for the down payment. It’s such a common problem that institutions have come up with possible solutions. Let’s look at some of your options…
VA
If you’re a Vet. Thank you for your sacrifice and service! For that sacrifice, the Veteran’s Administration will guarantee your home loan which allows lenders to grant a loan with no down payment. You can even negotiate with the seller to pay all your closing costs as well. There is a fee that is paid to VA called a funding fee, however, this can be added into the loan, which most people do. Also, if you receive any disability payments from VA, this funding fee can be waived.
FHA
The Federal Housing Administration has made it much easier to purchase a home with as little as 3 1/2% down payment. Back at a time when most down payments were 50%, this was welcome news. Like VA, you can negotiate with the property seller to pay your closing costs. But, what is you can’t come up with the 3 ½% down payment? There are a couple of solutions for this as well. First, some lenders and/or local communities offer down payment assistance programs covering up to 100% of the required down payment. Another alternative is a gift from a relative. There is some additional documentation required along with a gift letter stating that the donor does not expect or imply any repayment.
$100 Down Payment
You may see an advertisement from mortgage lenders offering a $100 down payment loan. This is an FHA loan meant for FHA-repossessed homes, so they may not be in the best of shape. But, if there are any in your area and you’re looking for “a deal”, it doesn’t hurt to take a look.
Fannie Mae or Freddie Mac “Conventional Loans”
These are the (FNMA) Federal National Mortgage Association and (FHLMC) Federal Home Loan Mortgage Corporation. FHA loans come with a hefty up front and monthly fee for the entire term of the loan called a Mortgage Insurance Premium (MIP). To avoid this, many homebuyers will seek out conventional financing with the assistance of FNMA or FHLMC. These loans typically require a down payment of at least 5% and also require mortgage insurance, called Private Mortgage Insurance (PMI). The premiums on this mortgage insurance are less than FHA’s and are lower with the more you put down. With 20% down, there is no need for mortgage insurance. Like FHA, a gift from a relative is acceptable however if that gift is anything less than 20%, the buyer must show proof that they can contribute at least 5%.
Fannie Mae and Freddie Mac do offer lower down payment options, typically 3%, but there is usually an income restriction or the property has to be in a particular area. Additionally, from time to time, some lenders will actually subsidize the borrower, allowing them to purchase a home with only 1% down. This too is limited to people with lower incomes.
Final Thoughts on Down Payments
You need to be aware that lenders are very particular about how down payment and closing costs funds are documented. If you are buying a home, avoid moving funds around without first discussing this with your lender. Lenders will want to know the source of all of your funds.
No portion of your down payment or closing costs can be borrowed funds. The only exceptions to this are for costs paid “outside of closing”. This could include the credit report, an appraisal, and a property inspection. These can all be paid with a credit but be careful that this doesn’t adversely affect your credit score!
