You’ve probably heard the same advice as everyone else when it comes to mortgage down payments. The goal is to pay 20% down.
Yes, that is the magic number for skipping mortgage insurance, but it’s daunting when you do the math. For a $200,000 home, that means you would need to save $40,000 in cash.
That’s on top of the money you need for closing costs, incidentals, moving expenses, and more.
Two factors are making homeownership a more achievable reality: lower down payments and down payment assistance.
Down payment assistance is a type of program that does exactly what you would expect: it gives you the money you need for your down payment. These programs allow you to skip the years-long process of saving up a down payment.
The tricky part is understanding the ins and outs of each assistance program available. Down payment assistance comes in many forms.
Sometimes the assistance is an all-out grant from a non-profit organization that wants to improve homeownership rates. In other cases, it’s a way for financial institutions to make extra money.
Let’s take a look at the details you need to know.
As you review your down payment assistance options, there are two key types of programs you will see.
Down payment assistance is meant to be just that: assistance. In a program that is designed the way it was originally intended, the money is more of a grant than a loan.
In many cases, you receive the down payment as a loan, but the loan is forgiven after you make your first six payments on time. This type of program is ideal because it truly gives you the money, rather than giving you a loan and costing you more money in the long run.
These down payment assistance programs are great for first time home buyers that qualify based on their income but may not have enough saved for down payment. As you can imagine, there are many future homeowners competing for them and there is a limited amount of money to go around.
The pros and cons will vary with each specific program, too. For example, some programs and guidelines are strict with debt to income ratios. Some will review your financial behavior and having for example, an NSF (non-sufficinet funds fee) reported in your bank statement in the last twelves months, could disqualify you.
An experienced expert in the finances of home buying can help you sort out your options.
There is a second type of program that people often call down payment assistance. In reality, it’s more like a second mortgage that is meant as a down payment.
The money you receive is a loan like any other loan, with monthly payments and interest fees. The loan also uses your home as collateral, so the lender puts a second lien on your property in addition to your mortgage.
Unlike the first type of down payment assistance, these loans are not forgivable after many years. They are actually financial products meant to bring more money for the lender rather than true assistance programs.
There are clear pros and cons with this type of down payment program. The benefit is that these loans aren’t as competitive as true down payment assistance, so they’re more accessible.
At the same time, these loans will cost you more money because you’re paying interest on your down payment in addition to the rest of the mortgage.
The truth is that neither of the options above are ideal. They can be difficult to obtain and you may end up spending more money than necessary.
A simpler and less stressful alternative is to work with a mortgage professional from the start. We can help you structure your mortgage loan in a way that gives you the down payment you need. You become a homeowner without the hassle of other assistance programs.
The details will depend on your financial circumstances. However, our team is well-trained in reviewing your details and determining the best option for your needs and goals.
With all these options and details, you may be wondering, why do I even need to increase my down payment? What are the advantages?
As it turns out, there are several ways a healthier down payment will improve your home buying process.
Buying and financing a home is expensive, no matter how you look at it. Anything you can do to save money is an advantage.
The higher your down payment is, the less you need to borrow for your mortgage. Borrowing less money means you’re paying interest on a smaller loan. This can save you thousands over the years.
Did you know your down payment can help you qualify for a mortgage or get a better interest rate on your mortgage?
Mortgage lenders look at many factors to determine how attractive and low-risk you are as a borrower. They evaluate your credit, your income, your debts, the house you want to buy, and more, including your down payment.
A higher down payment makes you a more desirable borrower. If your credit or debt-to-income ratio isn’t stellar, a higher down payment could make the difference between whether your mortgage is approved or rejected.
We won’t mince words: down payment assistance programs and loan programs are complicated. There are numerous options available today, all with their stipulations and strings attached. It’s too much for any homeowner to take in by themselves.
Our mortgage specialists have in-depth insight into down payment assistance and how to find the best path to homeownership for each person. Contact our team today to find out more about how we can help.