For many first time home buyers, down payments can be a significant obstacle to obtaining a mortgage loan, as most home loans require sizeable sums up-front. This article will let you know what options are available to every type of first-time home buyer.
Down payment requirements vary from program to program. Essentially, the amount required for a down payment will be larger for uninsured loans, since lower down payments present an increased risk to lenders.
With the protection of a guarantee, lenders can offer government-backed mortgages with lower down payment requirements. Therefore, several loan programs are available to first time home buyers that offer a low minimum down payment:
These federal loan programs could also suit first time home buyers with bad credit, as the government guarantee will alleviate some of the lender risks in financing these loans.
While making a larger down payment might not be feasible for all borrowers, it presents several distinct advantages for those able to gather the necessary funds:
Private mortgage insurance (PMI) is a set of fees levied to borrowers that protect lenders from taking substantial losses in the event of borrower default. These expenses provide no inherent benefit to borrowers, other than allowing them to obtain home loans with more risky credentials, including smaller down payments.
However, with a down payment of 20% or more, borrowers can avoid these expensive fees for their home purchase, which can amount to between 0.5% and 1% of the loan amount annually.
1. Pay Off Other Debts First. When preparing a down payment on a first home purchase, many prospective buyers forego paying off credit cards and other forms of debt. However, credit card debt and similar forms of debt charge much more for interest than home mortgage debt, given the current market trends.
Additionally, since lenders will consider a borrower’s overall debt, it is advisable to save for a down payment after paying off higher priority debts, such as credit card debt.
2. Put More Money Down (if possible). Again, a larger down payment has significant advantages. While it's difficult to do in the short term, putting down more money can save borrowers a substantial amount, whether it be by eliminating PMI or lowering the mortgage interest rate.
3. Consider a Down Payment Gift. For first time home buyers who cannot afford the minimum down payment, consider asking family for help with a financial gift.
4. Draw from 401k. In some cases, a first time home buyer's 401k funds can be used as a portion or entire down payment, although withdrawing money from a 401k may include penalties.
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