Our Guide to Down Payments for First-Time Homebuyers

Are you ready to buy a home but worried that you don’t have enough saved? Take a look at these strategies for low down payment mortgages.

Prediction is a tricky thing. Despite our best efforts, we can’t say for certain what the economy will do. It’s possible to have a good idea of what the economy and the housing market will do next; however, we’ll never be 100% certain until it actually happens. No matter what the economy does, people still want to buy homes. But why would you buy a home during difficult financial times? 

Maybe it’s because the rental market in your area is getting more expensive each year. Inflation is rising and that means serious consequences for rent. Maybe you’re fed up with renting and you don’t want to continue to sink money into your living situation without gaining any equity. Or, maybe apartment living during the pandemic has proven to be too difficult for your relationship. Maybe you need more space for you and your partner, or you’re expecting a baby and you need more room.

There are a number of reasons why 2022 is the year that you want to buy a house. No matter what your situation is, you should be armed with the best information and strategies to guide you through this complicated process. 

So, how should you tackle this gigantic life milestone? There are many different strategies, but at some point early on, you’ll want to think about your down payment. Whether you’re ready to buy this year or you’re thinking about purchasing a home somewhere down the line, take a look at our guide to the different types of down payments for first-time homebuyers.

Help from State and Local Governments

Couple speaking with banker

Did you know that you might be able to get a grant from your local or state government if you buy a home in a certain area? Depending on your area, you may be able to get this fantastic financial help. These are known as down payment assistance grants or loans. Grants do not have to be paid back, which is fantastic! On the other hand, loans must be paid back. However, typically government loans have low-interest rates. 

When you’re looking for down payment assistance, you may be surprised at where these grants and loans can be used. Sometimes the area is as broad as an entire state or city. But on the other end of the spectrum, sometimes these programs are so narrowly targeted that they only apply to certain homes in certain neighborhoods. 

Most of these programs are run at either the city level or the county level. To find them, start by searching online for programs in the area where you want to live. Before you fully invest in this process, speak with your loan officer because not all lenders will accept all of these grants.

So, why should you choose this type of assistance? Again, the best of these programs are true grants – that means they never have to be paid back. The loans are often no-interest or very low-interest. Remember that this financial assistance can help you bring more to the table when you’re negotiating to buy a house that you really love.

Assistance from state and local governments is one fantastic option when you’re trying to find the funds for your mortgage – but it’s not the only one. 

Low Down Payment Mortgages

Mini home figurine on top of stack of dollars

Have you heard that you can’t buy a house without 20% of the listed price ready as a down payment? While that may have been the case in the past, it’s not true anymore. There are lenders out there who will agree to a low down payment arrangement based on a few factors. 

In general, there are three ways to secure a low down payment: a traditional loan with a bank or other mortgage provider, a Federal Housing Administration loan, or a Veterans Affairs or USDA loan. These loans each have their benefits and drawbacks. 

It may be difficult to get approved for traditional loans with low down payment rates. Take time to find out if there are lenders in your area who will work with a low down payment mortgage plan and see what you would need to do to be approved. 

You have to meet certain eligibility requirements for a VA loan. Members of the Reserves, National Guard, and any branch of the military must meet a set of certain service requirements to qualify for a VA home loan. Consult the VA’s website to learn more about what you need to qualify. 

USDA loans can only be used in suburban and rural areas. You must also be able to prove that you have low-to-moderate income to qualify. There are income limits that depend on where you live and how many people are in your household. Check out the USDA’s website to find more information.

FHA loans are complicated. With an FHA loan, you may only have to put down 3.5% for your down payment. However, these loans may only be available for homes in certain areas, and these areas may not be in the most desirable neighborhoods. But don’t write them off just yet! Check out FHA homes in your area, and you might be surprised at which homes qualify. 

Low-down payment mortgages sound like a great plan, but of course, there’s a flip side to this coin. While only having to put down a small down payment may sound fantastic, it also probably means that you have to pay for private mortgage insurance, which is an additional monthly cost you’ll need to budget for. A low down payment may also mean that you’ll have to pay a higher interest rate.

Using Your Retirement Savings

Man writing down payment on glass

Here’s a strategy that’s not advisable for most people, but it could work for some, and it is an available option. Essentially, you break into your retirement account early, withdraw your retirement savings, and use them as your down payment. 

Before you rush to do this, it’s important to know that you’ll have to pay taxes at least once when you use your retirement funds early. The government wants you to save those funds for when you’ll actually retire, so there’s a penalty to pay if you do break into the account early.

Again, for most people, it’s better to not use this money as part of your down payment and instead to keep these funds in your retirement accounts. 

Gifts and Crowdfunding

Sometimes, parents or relatives will want to help someone finance their new home. These people provide the down payment for the home as a generous gift. While this is not an option for everyone, it may be an option in your family. However, it’s important to know that if you receive a down payment as a gift, lenders might consider that a sign that you don’t have your own finances in order. 

For example, if your down payment is a gift from your parents and your credit score is low, that might indicate to lenders that you might not have the financial resources or savvy to meet your monthly mortgage payments. If you’re worried about approval, you may want to wait until you can afford your own down payment before you buy a home. 

You may have heard of crowdfunding for people who need medical procedures or who are trying to rebuild after a terrible accident. It’s also possible to crowdfund for your down payment. There are sites dedicated specifically to this type of crowdfunding. 

However, it’s important to read the fine print. Some of the money you receive may be eaten up by transaction fees that the hosting site charges. Make sure you thoroughly research the crowdfunding site you’re interested in before signing up or posting about it on social media. 

Save, Save, Save

Suburban home and front yard

Last but not least, the tried-and-true strategy for being able to afford a down payment is saving for it. Set up an automatic transfer from your checking account to your savings account every month, or more frequently. Cut down your spending where you can, find new ways to make cash, and put all that money in savings

While you have to live your life (and you should buy that latte!), don’t spend unnecessarily when you could be saving that money for a house instead. Empty out your Amazon cart, don’t buy anything extra at Target, cook your meals at home instead of eating out at restaurants, and save that money for your future home instead. 

Buying a home is a major milestone. To prepare for this process, you should find out what types of down payment assistance programs are available in your area. You could also speak with your employer and see if they work with any lenders who offer special assistance for employees of your company or organization. Research as much as you can and save as much as you can!

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