You are tired of paying rent, but can you actually afford to buy your first home? Coming up with a down payment is a big hurdle for any home buyer, and an especially tall mountain to climb for a first time home buyer. Ideally you want to come up with a 20% down payment, but that can be a HUGE number to buyers early in their job career still struggling with student loans. On a $250,000 home that equates to a staggering $50,000 – more than just taking your lunch to work to save money.
Ideally you will want to stash a substantial amount of money every month into a savings account until you are able to afford a down payment. But reality means this is difficult for many renters, and if the Oklahoma housing market is rising like it has been since 1985 and interest rates continue to remain low, then waiting to save up a down payment could actually cost you money in the long run. The good news is you don’t have to wait to win the Oklahoma Powerball lottery to purchase your first home. We have a lot of financing and down payment options that can get you into a home much quicker so you can stop paying rent and start building equity.
How much down payment do you need to buy a home?
Traditionally, 20 percent of the purchase price is the ideal down payment amount for a home purchase, for a lot of very good reasons. Most importantly with a larger down payment you can normally get a lower interest rate, saving you money in the long run. You also do not have to pay Private Mortgage Insurance – PMI – to insure your loan against default. PMI is an fee each month for an insurance policy that benefit your lender – not you.
But face it, many home buyers, especially when purchasing their first home, are unable to easily come up with a 20% down payment. Luckily there are options available that make sense for many buyers. Fannie Mae and Freddie Mac offer what is called a Conventional 97 loan. You only need 3% down payment and you can use a cash gift from a family member to make the down payment. So for a $150,000 house, you would need just $4,500 down payment, either from savings or a gift. The loan requires PMI, but once you reach 20% equity in the home you can refinance and eliminate PMI payments.
If you are a veteran, another option is a zero-down VA loan. This loan comes without any PMI, although for a zero down loan there is a VA funding fee, which can be financed in with the loan. We regularly work with one of the largest VA lenders in the country, Veteran’s First.
FHA is also a common funding source. You can finance with as little as 3.5% down payment and you can qualify with a lower credit score compared to a conventional loan. The down side is you will pay PMI for the life of the loan if you put less than 10% down payment.
You can still get a traditional mortgage with only 5% down payment, although you must pay PMI until you reach 20% equity.
Where to get the money for a down payment on a home?
You have three options when coming up with a down payment, assuming you don’t win the lottery. Beg, borrow or save.
Hopefully you won’t need to actually beg. But maybe see your parents more often? In real life, gifts from parents are a common down payment for a lot of first time home buyers. But you WILL have to account for the give with your lender. The lender WILL see the deposit in your bank account and will want to know where the money came from. In the case of a gift, they will want a letter from your parents (or whomever gave you the money) clarifying that it is a gift with no expectation of repayment.
There are also a number of down payment assistance programs that happen from time to time in central Oklahoma. While these are not common, they do pop up every couple of years and sadly, most buyers are not even aware of them. We have lenders who are aware of the programs available from various government and philanthropical organizations and can guide you to programs that might be available.
Borrow a down payment so that you can borrow money for a home loan? That might seem counterintuitive, and you are right. But buying a home is different than other types of debt because hopefully a home appreciates in value and this appreciation can help offset the cost of the debt. Consider this option carefully before making a commitment.
For a lot of folks, the Bank of Mom and Dad is there with excellent interest rates and flexible payment schedules. But mortgage lenders will seldom finance a purchase with this type of down payment. They want you to have skin in the game.
Saving is no fun, and certainly doesn’t offer the instant gratification of a loan. But saving for a down payment is still the best way to purchase a home. It shows your commitment to a home purchase and your ability to live within your means while still saving money. Lenders like borrowers who save for a down payment, and reward them with much better terms.
I know people!
I work with home buyers and mortgage lenders every single day. I can direct you to a solid, well respected lender that can provide you guidance well before you make a decision to purchase a home. They can explain the programs available and provide advice on polishing your credit so that you get the best terms for your home loan.