If you’re thinking, “I want to buy a home,” there are some important things to be aware of—especially if you’re a first-time home buyer. One important factor to consider is the down payment. Whether you’ve saved up for a down payment or are trying to gather allowable funds, it can be a challenge. However, there are ways to overcome this challenge without jeopardizing your financial future.
Let’s take a look at a few common ways to help satisfy the down payment requirement for your new home.
The Type of Loan You Choose
When many people think of down payments, they think of the traditional 20% down payment. But this isn’t always true. For starters, if you are a veteran or active military member, you may qualify for a VA loan. VA loans require zero down payment. Also, if you qualify for an FHA loan, down payments can be as little as 3.5%.
In addition, conventional loans may require as low as 3% down payment to qualified borrowers. However, since they are not insured or guaranteed by the government, the risk may be higher for the lender. This is why lenders often require private mortgage insurance (PMI) if the borrower puts down less than 20%.
Have you been saving for a down payment? If you haven’t, it’s a good idea. One rule of thumb is to put aside 20% of your income for one to three years if practical. Of course, this depends on many factors such as your income, your debt situation, the price of the home you’re looking to buy, and the type of loan that is right for you.
If you need help with your down payment, you can receive down payment assistance from a relative, close friend, or employer in the form of gift funds. However, this will need to be documented properly. Your lender can assist you with a gift letter that will need to be signed to certify that the money is a gift. This should include such facts as the name and address of the giver, the amount being gifted, address of the property being purchased, the relationship of the giver, the source of the money (i.e., which account), and a statement that the money is a gift and not a loan.
Also, be prepared to provide a thorough paper trail of the gift funds for documentation purposes (i.e., bank statements, canceled checks, etc.).
The Gift of Equity
A gift of equity refers to a gift provided by the seller of a property to the buyer. The documented gift represents a portion of the seller’s equity in the property and is transferred to the buyer at closing as a credit in the transaction. The gift of equity can be applied to down payment, settlement charges (including prepaid items), and debt payoff.
A gift of equity is only permitted for primary residence and second home purchase transactions. It must come from a family member, who can also be a fiancé, fiancée, or domestic partner. It is allowed on Conventional, FHA, and VA loans.
You can use an inheritance as an acceptable use of funds for your home loan down payment. While you can apply for a mortgage without these funds, they need to be received before the loan closes.
DPA and Grant Programs
There are many federal, state, and local programs worth looking into to help you meet your minimum down payment requirement. In some cases, you can use these funds to help pay closing costs as well. While DPA programs may vary, grant programs offer qualified borrowers money towards their down payment that, in some cases, may not have to be repaid.
Take extreme caution when considering this option. Consult your financial advisor if you’re considering drawing from your retirement and/or investments. You will typically need to pay this back and may face a withdrawal penalty.
Ready to Talk Mortgage?
Our team at New American Funding would be glad to share more information about down payment options, as well as what mortgage may fit your needs. Let them help you navigate the home buying process and work toward realizing your dreams of homeownership.