Looking for down payment assistance loans? Now more than ever before, buyers have an array of options for financing the purchase of a new home. Buying a home traditionally requires the buyers save up money for the down payment.
What Is a Down Payment?
The down payment is the amount of money a buyer must spend upfront to purchase a home; it is typically combined with a home loan to meet the total purchase price of a home.
Why Do Lenders Require a Down Payment?
Lenders consider the down payment as a way to reduce their risks. When homeowners have their own money invested in the home, they are less likely to default (stop paying) on their mortgages and they are more likely to keep the house in decent condition. Also, if the buyer does default and the lender has to foreclose, the down payment serves to limit some of the lender’s losses if the home is sold for less than the remaining mortgage balance.
Saving up for a down payment requires hard work, which helps to prepare borrowers for the financial self-discipline required for successful homeownership. The more you can save, the less you have to borrow. Nonetheless, it is the down payment that stymies some buyers, even credit-worthy buyers, especially those buying a home for the first time. For that reason, down payment assistance programs are available to buyers who can qualify for them. In some cases, no down payment will be required at all.
Do You Qualify for a Down Payment Assistance Loan?
Be sure you investigate all of the available down payment options before you commit to financing your home purchase. Here are some of the available down payment assistance programs that you may be eligible to use:
Federally Guaranteed Loans with No Down Payment Required
Two very specialized and well-known government-backed loan programs require no down payment at all. In these loans, the Federal government is the loan guarantor, which reduces the risk to the lender. One program is the VA loan program for armed servicemembers and veterans. The other is the USDA loan program for eligible buyers in specific rural areas.
Federally Guaranteed Loans with Minimal Down Payment Required
If you are a buyer with good credit, you may be able to qualify for a loan with a small down payment. Buyers with a credit score of at least 580 can get an FHA loan with only 3.5 percent down. Buyers with credit scores of 500 to 579 can get an FHA loan with only 10 percent down.
If a buyer is unable to pay a down payment of at least 20% of the home purchase price, the borrower will have to buy some form of mortgage insurance. With FHA and USDA loans, it’s called a Mortgage Insurance Premium (“MIP”). For VA loans, it’s called a Funding Fee. This insurance protects lenders from losses in the event of the buyers’ default. With MIP to protect them against losses, lenders are willing to lend with these low down payments.
Private Mortgage Lending Programs
Private lenders also offer low down payment loans. To offset the risks that these small down payment loans present, the lenders will require buyers to purchase private mortgage insurance (“PMI”) when they pay less than 20 percent as a down payment on a home.
When you buy mortgage insurance, you only have to put 3 percent down on the home, meaning you can borrow up to 97 percent of the home’s purchase price. If you are buying a duplex, condominium, or manufactured home, you will have to put at least 5 percent down.
The cost of the PMI depends on the amount of your down payment. As a rule of thumb, a larger down payment will get you a better interest rate and you will pay less for mortgage insurance.
How Much Down Payment Should You Pay?
It is true that a bigger down payment will potentially get you more house and a bigger loan. However, it may pay to keep some of your down payment in reserve for a future emergency. Here are some reasons to pay a smaller down payment:
Keep an Emergency Fund on Hand. Protect yourself against financial emergencies by keeping some funds set aside in an account just for that purpose. Don’t drain all of your funds to make a bigger down payment.
Pay Off High Interest Debt First. You would be better off using some of the savings to pay off high interest debt like credit cards instead of putting the funds toward a larger down payment. You’ll reduce the financial stress on yourself and pay less interest costs over all.
Don’t Wait Too Long to Buy. Waiting to buy a home for a long period while you save for a large down payment can be a costly mistake. Over time, the price of the home you want is more likely going up, not down. On average, real estate in the United States increases in value by 2 to 4 percent each year.
Contact the Mortgage Financing Experts at Fairfax Mortgage Investments for more information
Buying a home is a big step. Work with the professionals at Fairfax Mortgage Investments and have confidence that you have chosen the best financing strategy for your needs. They can help you avoid costly mistakes so you can enjoy the benefits of home ownership for many years.