How to Buy Your First Home Without a 20% Down Payment
Down Payment Crisis? Here’s What You Need to Know About 20% Down Payments
“I’ve Heard I Need a 20% Down Payment, Is This True?”
First off, let’s dispel the myth that you need a 20% down payment* to buy a home. For many Millennials and first-time buyers, securing 20% for a down payment on a home is a major roadblock. And we get it; it’s daunting! Fortunately, not every loan type requires a full 20% down payment for a home. For example, some loans, such as the FHA, require home deposits as low as 3.5%, making a home down payment achievable for new buyers.
But how to do you decide what kind of down payment is right for you? Can you really afford to buy a home without a 20% down payment in today’s competitive market? Are there other ways to buy your first home? Yes! And Options is here to help.
Begin With Confidence; You Can Buy a Home Without 20% Down
If you’re having trouble securing a full 20% down payment, don’t worry, you fall into the majority of homebuyers. According to the National Association of Realtors, “81 percent of Americans purchase their first home with less than 20 percent down.”
According to Marietta Rodriguez, vice president of lending for NeighborWorks America and multiple national homeownership programs, “the narrative that in order to buy a house in America today you need 20 percent down is just not true. There are a lot of different products that offer low down payment options.”
For Millennials, this sage insight will undoubtedly usher in a welcome sigh of relief. While smaller down payments can be reassuring, they aren’t without their disadvantages. For starters, you may need private loan insurance, and you’ll need to secure a larger mortgage that will take longer to pay off. But the fact remains – you can rest assured, knowing there are indeed lenders who are willing to work with less than 20% down.
Take Advantage of Diverse Loan Options
One of the easiest ways to buy a home without putting 20% down is to vet your loan options. According to Credit.com, if you secure a 30-year fixed-rate FHA loan, you only need a 3.5% down payment. Additionally, conventional loans up to $417,000 only require a 5% down payment. However, “should your loan size exceed $417,000, another 5% down payment kicks in, for a total of 10% down needed all the way to the maximum conforming loan limit in your county.”
So where can you find out more about loans that require less than 20% down? There are many loan options available, each one distinctive from the others, but here’s a good place to start thumbing through loan programs to find the most successful loan for you.
Get Creative With Your Funding
Savings accounts and paychecks aren’t the only way to fund the purchase of a home. For example, many 401(k) plans allow you to borrow up to 50 percent of your 401(k) plan balance (or $50,000, whichever amount is smaller). And if you’re a first time buyer, you’re eligible for an addition benefit: “[you] may qualify to take up to $10,000 from an IRA without paying early withdrawal penalties.”
Keep in mind, though, that tapping into your 401(k) or any IRA assets directly impacts your retirement savings. And, if you leave your current employer, some 401(k) plans will require immediate repayment.
Looking for another way to buy your home without a 20% down payment? Ask a parent or trusted relative to co-sign the home mortgage with you. ATTOM Data Solutions recently released a study showing that “co-borrowers account for 23% of single-family home purchase loans in Q2 2017.” We understand that not all buyers feel comfortable asking parents for financial assistance, but it’s an important option to consider if you’re strapped for cash and trying to buy your first home.
Whether you forgo other hefty expenses, like a big wedding or travel, or you reach out to a family member for assistance, there are countless ways to make your dream of owning a home a reality. At Options, we’re well-versed in creativity, and we’re committed to helping you secure a loan for your home. If you’re ready to figure out down payment and buying logistics, or you’re looking for information on first-time buyer assistance, reach out! We’d love to help.
* Example Disclosure. Down payment information on a 30 year fixed loan: Loan amount $300,000, 20% down, monthly payment without taxes and insurance $1,475.00, APR 4.389%.