Getting To Know The First-Time Homebuyer Down Payment

The first-time homebuyer down payment is often misunderstood, but nonetheless important for prospective owners to comprehend. Few aspects of a purchase, after all, will actually have more of a lasting influence on your financial situation moving forward than the amount put down at signing. The down payment will determine your monthly payments and additional costs in the future, so it’s a good idea to know as much about it as you can about this pillar of homeownership. The more you know about your own first-time homebuyer down payment, the better prepared you’ll be for owning a home. Continue your online education by learning as much as you can about down payments in the following.

How Much Down Payment Is Truly Necessary?

To be perfectly clear, the amount of money due at signing is entirely dependent on the loan you have been approved for. Consequently, there is no universal down payment variable or “one-size-fits-all” answer to the question; everyone is going to find that their specific amount is unique to their personal situation. More specifically, down payments will vary based on a number of factors and criteria.

The most popular answer, however, is 20 percent. Most buyers strive to put down at least 20 percent of the purchase price, as to avoid paying private mortgage insurance (PMI). If for nothing else, buyers capable of putting down at least 20 percent are viewed as “less risky,” and won’t have to pay additional fees that lenders use to offset risk.

“The narrative that in order to buy a house in America today you need 20 percent down is just not true,” says Marietta Rodriguez, vice president of national homeownership programs and lending for NeighborWorks America, a national nonprofit focused on community development and homeownership. “There are a lot of different products that offer low down payment options.”

Not everyone has the luxury of being able to put down 20 percent, especially in higher priced markets like California. With the median home value in California now somewhere in the neighborhood of $539,000, a 20 percent down payment would translate to $107,800 due at signing, more commonly known as a “small fortune.”

Fortunately, 20 percent is only required if you want to avoid paying private mortgage insurance. As Rodriguez was quick to point out, there are more products and services that award buyers the opportunity to put less down.

Fannie Mae and Freddie Mac will back loans with down payments as low as three percent. Loans offered by the Federal housing Administration (FHA) only require a 3.5 percent down payment if the borrower has a credit score higher than 580. Better yet, VA (Veterans Affairs) loans allow qualifying veterans to buy a home without putting any money down.

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Private Mortgage Insurance

Private mortgage insurance represents a safety measure implemented by lenders to offset the dangers associated with “risky” borrowers. More specifically, however, lenders will charge borrowers private mortgage insurance if they don’t put at least 20 percent down at the time of purchase. The PMI is intended to compensate the lender in the event the borrower defaults on their mortgage, and is typically added to the monthly payments. As a result, PMI shares a direct correlation with the amount put down: the more money buyers put down, the less they will be expected to pay in PMI. It is also worth noting that a borrower’s credit score will also influence the amount of PMI they will be expected to pay.

Private mortgage insurance is a double edged sword, however. On the one hand, it enables borrowers to put less down upfront. On the other hand, it adds to monthly mortgage payments, albeit incrementally. Freddie Mac has already estimated that PMI tends to add somewhere in the neighborhood of $30 to $70 per month for every $100,000 borrowed.

If you are fine with the idea of paying PMI and more inclined to pay less at signing, here are two loan options you should pay special considerations to:

FHA Loan

Loans backed by the Federal Housing Administration have become synonymous with relatively low down payments. Borrowers with a credit score of 580 or higher can qualify for an FHA loan if they agree to put at least 3.5 percent down. Those with a lower credit score (between 500 to 579) can receive an FHA loan if they agree to put down at least 10 percent, too. As a result, it’s hard to argue that FHA loans aren’t one of the best first-time homebuyer programs for borrowers looking to avoid paying a large down payment.

Veterans Affair Loan (VA Loan)

As their names suggest, VA loans are specifically designed to aid military veterans. And while veterans will be expected to pay a small fee for using a VA loan, they will not need to make a down payment. According to U.S. News, veterans will be “required to pay a funding fee of 2.15 percent of the loan amount upfront instead of PMI, which can be financed. If you have a service-connected disability, the funding fee is waived. You still have to qualify for the loan based on income and credit, but the interest rate is likely to be lower than a conventional or FHA rate, plus there is no monthly PMI.”

Best Down Payment Strategies For First-Time Buyers

The best down payment strategies for first-time buyers are different in every scenario. What works well for one buyer may not even be an option for another. That said, here’s a list of the most popular options made available to today’s borrowers:

• Look For A Lower Down Payment: Most buyers will strive to put at least 20 percent down, but not everyone has the luxury of doing so. Fortunately, down payments as high as 20 percent aren’t necessary, but rather recommended for those that want to avoid paying private mortgage insurance. As a result, there are loan options that enable borrowers to put much less down; namely, FHA loans. Qualifying borrowers, for example, may be able to put as little as 3.5 percent down for an FHA loan. Perhaps even more importantly, there are several options that allow buyers to put down less than 20 percent.

• Ask Your Family For Help: There is absolutely no shame in asking your family to help with the down payment on your first home; more and more buyers are doing it as prices continue to increase. A gift can go a long way in turning a buyer’s dream into a reality. Of course, this down payment strategy requires that someone in your family not only has the funds to do so, but is also willing and able. On top of that, lenders will follow up to make sure the help is in the form of a gift that doesn’t need to be repaid. According to Garrett Clayton, CEO of AmCap Mortgage in Houston, “From a lender perspective, if it is something that will be required to be paid back, then we would need to take those terms of repayment into the calculation of the borrower’s [debt-to-income] ratio, to make sure they still qualify.”

• Seek Out State And Local Assistance: In the event there’s no chance you’ll be receiving any help from your family, don’t fret; state and local government assistance programs exist for a reason. Nationwide, there are countless programs designed to help new buyers come up with the money they need for a down payment. Government agencies, nonprofits, foundations and employers offer various types of down payment assistance in each state. Of course, there are usually criteria that must be met in order to qualify, but those that do could be in for a significant benefit.

These down payment strategies are in no way representative of every single option made available to buyers, but they are some of the most popular. A frugal buyer, however, may prefer the most obvious strategy: purchasing something more within your means. Quite simply, there’s a good chance you shouldn’t be buying into a home if you can’t afford the down payment. The easiest strategy may, therefore, be to simply buy a less expensive home.

For one reason or another, far too many prospective buyers don’t have a firm grasp on the first-time homebuyer downpayment, which is a dangerous position to be in. The average first-time homebuyer down payment is a large sum of money, and can impact how your finances unfold moving forward. That said, it’s a good idea to know what you are getting into before you make any commitments. The more you know about your down payment, the more prepared for homeownership you’ll be; it’s as simple as that.

Key Takeaways

• The first-time homebuyer down payment is often misunderstood, to the detriment of many new buyers.
• First-time homebuyer down payment assistance exists for those that need help moving into a new house.
• The average first-time homebuyer down payment may not be as high as you think it is.