Among the most challenging hurdles to overcome on your path to home ownership is the down payment. Unless you are in a great position of financial advantage, coming up with a large sum of liquid capital at one time is a difficult task, making this particular aspect of purchasing a home one of the most fearsome. If you’re struggling with your down payment, you’ve got some options you can consider.
How much do you need?
The widely preferred minimum down payment for a home is 20 percent, which can be quite burdensome with most mortgages. If for example you are looking at a $250,000 home, you should be able to pay $50,000 up front, which is a lot to ask of even the hardest-working and most financially savvy professionals.
The 20 percent down payment is considered the standard because it protects the interests of a lender, but it also provides homebuyers with several benefits. According to Hal M. Bundtrick of NerdWallet, making a 20 percent down payment likely means you’ll earn a better mortgage interest rate, lower fees over the lifetime of the mortgage, a lower monthly payment and more equity in your home up front. If you’re thinking long term — which is crucial for home ownership — these are all extremely attractive advantages.
Can you pay less than 20 percent?
Because it’s well understood that most working Americans can’t afford 20 percent of a mortgage up front on their salaries, the Federal Housing Administration offers an alternative that’s extremely beneficial to low- to moderate-income earners and first-time homebuyers. Part of the U.S. Department of Housing, the FHA offers insured loans that help lower down payments and closing costs and make it easier for buyers with poorer credit to quality. With an FHA loan, you can make a down payment as low as 3.5 percent on your first home.
If you are a veteran or an active-duty member of the military, the U.S. Department of Veterans Affairs also offers unique loans and mortgages to help you buy a home. With a VA loan or mortgage, you could potentially pay zero down while still pulling a good rate, helping make your dream home more affordable. According to Bundrick, there are also zero down payment programs available through the Department of Agriculture’s Rural Development program.
You can also check with your local financial institutions to see if they offer down payment assistance programs. Rebecca Lake of U.S. News & World Report cites the example of the state of Texas, where the Department of Housing and Community Affairs provides up to 5 percent down payment and closing cost assistance for eligible buyers. In Indiana, the Individual Development Account program will match a minimum of $4 for every $1 that eligible program participants put toward the purchase of a home.
How to make it work
Short of negotiating with a local financial institution or qualifying for a down payment assistance program, you may simply be stuck with the expectation that 20 percent of a home’s value needs to be paid up front. If you are not in a position where this is feasible, your best bet may be to work toward a scenario where it is. To achieve this, Donna Fuscaldo of Investopedia recommends reshaping your budget or selling your personal belongings, while Elizabeth Weintraub of The Balance suggests bulking up your savings input or reserving your tax refund. Perhaps less ideal is the idea, posited by both, that you ask for a loan or gift from a relative or loved one — setting aside the tax burdens of doing so, this can create unnecessary strife if you hit a financial hardship and are unable to repay that generosity.
Perhaps the most interesting idea comes from Weintraub, who proposes asking that the seller cover your down payment as a credit for closing for their asking price. If you attempt this, it’s best to ask your lender about the feasibility first as there are limitations on credit sizes.
If you feel that you are ready to purchase a home, a down payment is virtually guaranteed. Make sure that you are in the best position possible to cover that obligation, and speak with your financial institution to learn how you can make your dream of home ownership a reality.