If you’re a first-time homebuyer, it’s important to understand your down payment options. A down payment is a lump sum paid upfront that reduces the amount of money borrowed. And with median home prices on the rise, choosing the right down payment option for your situation is crucial.
What’s a down payment?
The purpose of a down payment is to demonstrate personal involvement in the purchase of a home. It also protects the lender against possible losses in the event of default.
Your down payment affects your loan-to-value ratio (LTV), which is the difference between the amount borrowed and the sales price. For example, if the sales price is $100,000 and the loan amount is $80,000, then LTV is 80 percent with a 20 percent down payment.
When thinking about how to save for a down payment, imagining a lump sum of money large enough to buy property might sound like a thing of myth and legend. But with a healthy dose of determination (not to mention patience), it’s not impossible to get there. And no, you don’t need to give up every simple pleasure in life — you can have your avocado toast and eat it, too.
Figure out your down payment savings goal, then make a plan
You might not actually need to save as much as you think. Lenders typically want a 20 percent down payment on a conventional home loan, but many will accept far less with the purchase of mortgage insurance, and there are other loans available that require even smaller down payments. FHA Loans will accept a 3.5 percent down payment, for example, but buyers will want to consider the pros and cons of using one. If you’re a Veteran, you can use a VA loan to purchase a home with 0 percent down and lower interest rates than conventional loans.
When figuring out how much you’ll need to save, consider the following: What size type of property will you want, and how much are those selling for in your area? Considering what loan you’ll apply for, what percentage will you need for your down payment? Schedule a free consultation with West Community Mortgage to find out your options and qualifications.
Down Payment Assistance Programs
It’s also helpful to check for first-time homebuyer programs offering down payment assistance and lower rates to young, hopeful homeowners. Eligible households could receive a hefty chunk towards your down payment with these programs.
Do better than your regular savings account
With APY on regular savings accounts being basically non-existent these days, transfer your “future home” money to an account that collects much higher interest. If you’re feeling ready to commit to your savings plans, you might consider putting money into a more-dramatic Certificate of Deposit account. You won’t be able to access your money for a set amount of time without paying a fee, but you’ll be earning interest higher than a traditional savings account.
Save your raises, bonuses, and tax returns
It is SO EASY to fall victim to lifestyle inflation every time you get a raise or better-paying job. But instead of upgrading your car or apartment, ask yourself if you can keep living a simpler lifestyle for a few more years so that money can go straight to savings instead. Every time you get an income increase, increase the amount of money you’re automatically transferring into savings each month. If you maintain your lifestyle, you’ll gradually save more and more without feeling the burden of penny-pinching.
Similarly, I know it’s tempting to spend your tax return or yearly bonus on things you’ve been eyeing, but putting them straight toward your savings account will fuel your momentum and put your goal within sight.
Small and slow is totally OK
Even if home ownership seems COMPLETELY out of reach, you can still get the ball rolling, if slowly, toward a future savings goal. Putting aside any money at all, be it $50 or $100 or $200 or more for even as far as 5-10 years down the road, into a designated savings account helps set your intention and put you on the path toward savings more.
Last resort: Secured loans
If you’ve exhausted all of your options for a down payment and find yourself falling short, you might find some funds in the equity you already own. Loans taken against a secured asset (like a retirement account, car, or other real estate asset) require documentation and verification of the deposit into a liquid account. The terms of the loan must also include these payments in the debt-to-income ratio. If prolonging debt is a concern, you may need to adjust your homebuying goals.
Ready to get started?
West Community Mortgage can answer any questions you may have about home loans or down payments with a complimentary consultation. Contact the Mortgage team to get more detailed information about our mortgage solutions, or get pre-approved now.