The Skinny on Down Payments
If you’re one of many potential homebuyers hoping to take advantage of the spring real estate market, one of the questions on your mind is how you’re going to pay for the home once you find the one you love. If you’re fortunate to get over the hurdle of securing financing, you still have to figure out how you’re going to pull together your down payment so you can make an offer on a home.
Today we’re going to break down 1) how much you need, 2) where you can get it, and 3) who might be able to help with your down payment.
How much do I need for the down payment?
Answer: it depends.
VA Loan - If you’re a qualifying veteran and get a VA loan, you won’t need any down payment. You can read more about who qualifies and how to apply on the VA loan website.
FHA Loan – If you qualify and apply for an FHA loan, you may be paying as low as 3.5 percent of the home’s purchase price.
In general, most lenders and banks are going to want 20 percent down, but there are lenders who will finance your mortgage for as little as 5 or 10 percent down. To figure out what works for you, look at your current financial situation, shop around for lenders, and if needed, talk to a financial advisor.
Don’t I want the lowest down payment percentage?
Not necessarily. Unless you qualify for a VA loan, if your down payment is less than 20 percent of the purchase price, you will need to purchase PMI, or Private Mortgage Insurance to protect your lender in case you default.
Plus, 20 percent down will give you the best interest rates on your mortgage.
Then again, if 20 percent is too steep for you, paying down less might make buying a home more accessible to you. And with the equity you gain, you may be able to come out on top. It all depends on your unique situation: your savings, your credit, the price range of your home, and your future financial plans.
Okay, so where do I find this cash for the down payment?
There are a variety of sources you can use to pull together the down payment. Some are obvious, some you may not have thought of:
· Save – first and most obviously, save! Try to go out less, curb little expenses that really add up. It may take a while, but you can work toward building up a little nest egg for the down payment (as well as closing and any moving costs).
· Source Your Assets – do you have a retirement account? Life insurance? CDs? You can withdraw from many of these accounts without getting a penalty. Check with your lender’s specific criteria as well as your accounts to see how much you can use. This is definitely ideal, but if you need just a bit more and are willing to take a risk, consider this option.
· Sell Your Things – Liquidate stocks you have. Cash in any bonds. Pawn any valuable heirlooms (that you’re okay parting with). Sell your boat or RV. Have a garage sale to make a little extra change.
· Say Goodbye to High Payments – Refinance your vehicle if you can and use the extra you gain to finance the down. Finish paying off that pesky credit card, so that the interest can all go toward your down.
· Say Hello to Extra Cash – Ask for a raise or get a second job.
What if I still need help making the down?
First, you might ask yourself if this is really the best time to buy a home for sale. If it is and if you have a good opportunity, you can get help from a handful of places:
Gift Money – Check with your individual lender, but you may be able to use gift money for the down. Generally, this must be actually a gift (you’re not going to pay it back) from someone related to you and must be accompanied by a letter stating the amount and the person’s relation to you.
Local Help – There are also many federal and state programs that can offer down payment assistance. These programs are constantly changing and vary by not only state, but even city! Look up your state’s local homebuying programs to see what kind of help might be available for you.