If you meet the qualifications for certain types of loans—e.g., VA, FHA, Fannie Mae, Freddie Mac—you may be able to put down as little as 10%, 5%, 3% or even 0% on a first home, but this article focuses on the benefits of and the how-to-come-up-with of the industry standard 20% down payment.
You are in an optimum position with the seller and the lender, when you’re able to provide 20% for a down payment. It indicates to lenders that you–the buyer—are serious, and that you have the ability to save money for a specific purpose. In a competitive market, your offer will be preferred by most mortgage lenders over those who cannot provide 20%. Your down payment also is a key part of the offer you present to the seller. It’s usually true that the larger the down payment, the stronger the offer.
You could get a better interest rate on your loan. “Jumbo loans,” or loans in excess of $417,000, may be considered a higher risk and require a higher interest rate. A homebuyer who puts enough money down to lower a home loan out of the jumbo loan category could save thousands of dollars over the life of the loan.
You can avoid Private Mortgage Insurance (PMI) when you put down 20% or more, and your monthly payments will be lower. PMI, protects the lender if you were to abruptly stop making payments on your home. Typically, if your down payment is less than 20%, lenders will require you to carry PMI. With PMI, a higher risk client has the opportunity to receive financing, even if they are unable to put 20% down. PMI usually is only paid until the loan reaches an 80% loan-to-value (LTV) ratio.
Because, with a higher down payment, less of your monthly payment will be going toward interest, you will be able to build equity in your home more quickly.
How to Acquire Down Payment Money
Saving more of the money you already have coming in isn’t the only way to acquire money for a down payment. Here are 10 ways to acquire money without lowering your present lifestyle:
- Borrow from a family member and pay them interest.
- Financial gifts can be included in the down payment on some types of loans.Tax law allows gifts of several thousand dollars a year to be bestowed without tax consequences to either the giver or recipient. The gift does not have to be from a family member. Ask your Citywide Loan Agent if the down payment for your type of loan can include a gift.
- Get a second job. A part-time job could help you earn the extra money you need. Explore the many ways to make money from home.
- Add your tax returnto your down payment savings.
- Ask for a raise. Base your request on your accomplishments, not your need for a down payment.
- Look for lost money.Check the National Association of Unclaimed Property Administrators to see if you have any missing money.
- Borrow from your 401K. Just be aware that you have to pay back your 401k loans, with interest – typically at 2% above the prime rate.
- Withdraw from your IRA: Tax laws allow you to withdraw up to $10,000 in IRA funds to buy your first home. If you’re married and you both qualify, you could have a potential $20,000 down payment, and the penalty for early withdrawal is waived.
- Ask the seller for the money. Some sellers will be willing to do that, if you’re willing to pay their asking price. Some will give you the down payment as a credit, pay your closing costs, or both. You won’t know unless you ask. If the seller agrees to give you a credit for closing costs, that frees up money for the down payment. Check with your lender before asking.
- Apply for a DAP loan, also known as a second mortgage on your home. In most cases, the interest rate on a DAP loan will be the same as the interest rate on your first mortgage. Ask your Citywide loan agent about eligibility requirements.
How to Save Money for a Down Payment
- Make a budget that includes all your fixed expenses and an estimate of those that vary. Anytime the amount you spend in a month is lower, put the difference in your down-payment account.
- Use a budgeting app. Check this link for ways to save money on a tight budget.
- Save a certain amount by direct deposit from your paycheck every month.
- Save any tips, performance bonuses or profit sharing payments.
- Downsize your lifestyle:
- Move to a smaller apt. or a place with lower rent or utilities.
- Sell one of your cars and save the selling price. You will also save on car insurance and other car-related expenses.
- Eat out or get take-out less often. It’s less expensive to eat at home.
- Don’t buy pre-made coffee or lattes from a coffee shop. Make your own.
- Instead of paper towels or disposable diapers, use cloth/washable towels and diapers.
- Buy store/generic brand groceries and, where possible, prescriptions.
- Stop putting money into your retirement fund for a while. Put it in your down payment account until you savings goal is met.
- Save the money you get from cash-back credit cards.
- Round up purchases to the nearest dollar and save your change or the amount that’s not going on your credit card.
- Reduce credit card debt by paying off cardswith the highest interest rate first. For other tips, click here to see a Citywide article on paying down credit card debt.
- Invest the money you save in FDIC-insured instruments such as traditional savings accounts, certificates of deposits (CDs), and money market accounts, rather than the Stock Market.
While you’re building up your down-payment fund, don’t completely neglect your other savings goals, such as money to replace a car, necessary home improvements, unexpected expenses and your kids’ education. While most would not argue that a 20% down payment is ideal, for many it is simply not practical under their current circumstances. According to the National Association of Realtors, 71% of first-time homebuyers and 52% of all buyers put 10% or less down. Imagine the impact to our economy had those people been unable to buy a home. Delaying your home purchase until you have 20% may cost you in the long run. Call Citywide Home Loans for advice on what makes the most sense for you and your home-buying needs.