If you’re a first-time home buyer, you don’t have the benefit of spending the proceeds from the sale of a home toward your purchase. Thus, the typical first-time buyer has financed almost the entire purchase price of his home, i.e. 94%, according to a 2019 National Association of Realtors (NAR) survey.
At the same time, the median home price was $ 257,000. With a 6% down payment, you would need more than $ 15,000. When you add 3% to 6% of the purchase price for closing costs, the initial sum can double.
If you don’t have that money and you are sure you can buy a home, there is a way to get free or low down payment assistance without dip into your retirement funds or borrow from your loved ones. Taking advantage of a down payment assistance program (PAD) can keep your savings accounts intact or increase your down payment. And many of these programs offer help for closing costs, which further reduces your personal expenses.
There are approximately 2,400 homebuyer assistance programs across the country, says Sean Moss, senior vice president and director of operations and customer support at Down payment resource, an online aggregator of homeownership assistance programs. But these organizations are administered at the state, county and local levels. Properties within a few kilometers of each other may benefit from completely different aid. And, the qualification guidelines for a buyer or a property vary from program to program, continues Moss. This is why it is important to do your research.
Types of down payment and help with closing costs
The great thing about these programs is that they can help you get started with more equity in your home or keep money in your bank account. If this allows you to have a down payment large enough to start with 20% equity, you won’t pay private mortgage insurance, which can cost 1 to 2% of the loan principal per year.
As an example, Illinois homebuyers have access to several different programs through the Illinois Housing Development Authority. Currently, some of its programs offer up to $ 7,500 in down payment or assistance with closing costs in the form of forgivable or deferred loans. For a $ 200,000, 30-year mortgage with an interest rate of 3%, that would save you almost $ 4,000 in interest and reduce your monthly payment by about $ 30.
The down payment and closing cost assistance come in various forms. You need to understand how each can impact your bottom line. Some are primarily gifts, while others are reimbursed with little or no interest.
The best type of down payment or closing cost help is a grant. If you qualify, a grant is free money because it does not need to be repaid.
The most common type of assistance is a loan. Some are simple second mortgages that are paid monthly with your first home loan. These loans usually have favorable terms and low interest rates. If this is an option, a forgivable or deferred loan may be a better choice.
The forgivable loans are canceled over a fixed period. If you have a loan canceled over five years, the loan principal would be reduced by an equal amount each month for 60 months. With a forgivable loan, you only have to pay it back if you sell the house or refinance before the loan is fully forgiven. Even then, you will only be responsible for the remaining capital.
Other than a grant or cash help, this is the best kind of help because every month you build up equity without paying anything extra.
Deferred loans are only repaid when you sell the house or refinance your mortgage. For example, if you qualify for down payment assistance of $ 5,000 in the form of a deferred loan, it will not increase your monthly payment. However, a deferred loan would not increase your home equity because it is still money you owe.
PRO TIP: For reference we have outlined an example list of home ownership programs by state.
Where to find help with the down payment
Speaking with an experienced local real estate professional is a great way to get a feel for the APDs available. Your real estate agent or mortgage advisor is a good place to start. You can also contact a HUD Approved Housing Advisor for help with the home buying process, and they should also be aware of local assistance programs. These advisors charge a fee for their services unless you qualify for a fee waiver.
Since down payment assistance programs are so region specific, search Google for “down payment assistance in” [state, county, city]Recommends Scott Lindner, National Mortgage Sales Manager at TD Bank.
You can also search what is available by entering the property address details on acompteresource.com. You will need to enter your email addresses to receive the results, but you are not required to sign up for the newsletter. A handful of searches we did on the site returned relevant results and even highlighted program changes related to COVID-19, so the information seems up to date.
Lenders may also have their own products for first-time home buyers, such as a fee reduction or a closing cost subsidy, Moss said. While you shop for the best mortgage rates, find out about specific loans tailored to first-time buyers.
Additionally, nonprofits sometimes offer some form of financial assistance as part of a larger mission to increase homeownership in underserved communities. These are often not included in a downpaymentresource.com search, such as Habitat for Humanity or the Neighborhood Assistance Corporation of America.
How to qualify for home buying assistance programs
Once you know what home buying assistance is available in your area, you will need to make sure you qualify. Most down payment and closing cost assistance programs target first-time home buyers, but if you’ve been a homeowner, you may still qualify.
“It’s almost universal: if you haven’t owned a home in the past three years, you’re a first-time buyer,” Moss said. There are even exceptions to the rule. In some cases, if you are divorced or have done military service, the three-year requirement is waived.
Home buying assistance programs often require the borrower to take first-time home buying education to qualify. Whether or not it is required by the program, Lindner recommends it anyway. These courses are a great way to educate yourself on property obligations aside from mortgage and property taxes, he says.
Other loans or grants may only be available if you are in a specific income range. These income guidelines are generally based on the average household income in the area where you are buying a home. Other programs are in place to help people in certain occupations, serving in the military, or as a firefighter, law enforcement officer, or health care professional that could expand your housing assistance options.
The type of mortgage you take out can affect how much help you qualify for. This is something you should talk to your lender about because some loans have restrictions, says Lindner. You may find that a mortgage requires assistance to be a forgivable loan, he continued.
In addition to whether or not you qualify, the property will also need to meet certain standards. Each program serves specific areas or neighborhoods, so the location of the house is important. There are also neighborhood revitalization organizations that rehabilitate homes and then offer assistance to qualified buyers. And most ODAs place a limit on the purchase price of the home based on the value of homes in the area.
One more thing to consider when factoring in home buying assistance into your budget is financing. PADs do not have unlimited bank accounts. Program funds may be depleted by the time you decide to buy. “Some of these down payment assistance funds are seasonal,” Moss said. He does not recommend waiting as there is no guarantee that the money or the program you are waiting for will be available the following year.
Other ways to offer a deposit
Some government guaranteed loans offer 100% financing, but these mortgages come with additional restrictions. Mortgage loans from the United States Department of Agriculture are only available for properties located in eligible rural areas. A Loan from the Department of Veterans Affairs is an option if you or your spouse has a military background.
Other than that, a bigger one advance payment is ideal because it lowers your monthly fees by lowering your loan principal and may qualify you for a better mortgage rate. This is why some experts recommend that you put 20% less when you buy a house.
According to NAR survey mentioned above, most buyers end up covering the down payment with their savings. If you are having trouble building up your savings, this guide can help you create a budget you can stick with it. Family members are also allowed to donate funds towards the purchase of a house. But these should be documented as a gift and not a loan for your lender’s appraisal.
You are also allowed to borrow from your retirement account to cover certain expenses of buying a home. The rules are different depending on the type of retirement account you have and your personal situation. So if you are considering this option, consult a retirement or tax professional first. While the CARES law has facilitated withdrawals from a 401 (k) account without penalty, you will have to refund the money. Keep in mind that using your retirement funds means missing out on bankruptcy protections, tax benefits, and potential growth through compound interest.