5 Tips on Saving for a Down Payment (Beyond the Bank of Mom and Dad)
If you’re thinking about buying a home, you’ve probably given some thought to the down payment and how to come up with all that cash. A down payment is the money you “put down,” or pay at the time of purchase, for the home versus the amount you’ll borrow. For example, to buy a $200,000 home with 5 percent down, you would need to pay $10,000.
So how are young adults, already straddled with student debt and earning starter-job incomes, amassing that much money? According to Ross Tatka, an analyst in Fannie Mae’s Economic & Strategic Research Group, it can take over four years for the average first-time homebuyer, who saves about 5 percent of their annual income, to make a 5 percent down payment on a $175,000 home purchase (the National Association of Realtors® [NAR] median “starter” home price in 2014).
Many young buyers aim to put down even more — with a down payment of 20 percent, a homebuyer traditionally can avoid paying private mortgage insurance or PMI. However, “PMI may not be the big bad wolf buyers think it is,” says John Downs, a mortgage officer with Caliber Home Loans in Washington, D.C.
PMI does increase your monthly payment — the cost ranges from $30 to $70 per month for every $100,000 borrowed — but you’ll be enjoying the benefits of homeownership sooner. “There’s a balancing act between putting less down and paying PMI, or waiting longer,” Downs says.
Last year, young adults were the majority of homebuyers, and 76 percent of them were first-time buyers, according to NAR. While most used their savings for down payments, some used assistance from federal, state, or local programs.
Today there are almost 2,300 down payment assistance programs that provide help through mortgage credit certificates, financing at below-market interest rates, major employer programs, and grants. Borrowers may have to meet certain income, home location, occupational, or income requirements — but that can stretch well into middle-class figures and can hinge on local averages. The Minnesota Housing Finance Agency’s Start Up for First-Time Homebuyers allows household incomes of up to $124,000.
NeighborWorks America®, a national nonprofit community development corporation based in Washington, DC, says 70 percent of U.S. adults are unaware about down payment programs available for middle-income homebuyers in their community. “I would argue that percentage is even higher,” says Rob Chrane, president of Down Payment Resource (DPR) in Atlanta.
Chrane says there are dozens of down payment assistance programs and homeowner education options in most areas.
“The education component is absolutely essential for long-term success with the home,” says Ronald Martinez, senior credit officer with Neighborhood Housing Services of LA County (NHSLA), where the average home price is $525,700.
Homeowner Kolotita Fue, a mapping specialist, attended NHSLA’s homeownership class last November “looking for information,” but soon realized that homeownership could be within her reach. “Attending the class gave me the confidence and knowledge I needed to move forward,” she says.
But there can be a downside to using assistance programs as part of your offer. “Some sellers might be put off by the extra paperwork and time involved,” says Downs.
So what kind of down payment assistance — outside of mom and dad — is available to you? Here are five ideas to get you started:
- Put Less Down. Late last year, Fannie Mae, which purchases mortgages from lenders and is the owner of The Home Story, announced it would purchase mortgages with down payments of as low as 3 percent (compared with the previous minimum down payment of 5 percent), as long as one of the borrowers on the loan has not owned a primary residence within the past three years. Borrowers must meet certain eligibility requirements and, in some cases, complete homeownership counseling. Additionally, some buyers may qualify for zero-down options, including VA loans (guaranteed by the U.S. Department of Veterans Affairs) for veterans, servicemembers, and surviving spouses, and U.S. Department of Agriculture loans for low- to middle-income borrowers in qualifying rural areas. Use of both loan types is on the rise, according to the Census Bureau’s American Housing Survey, especially among first-time buyers.
- Home Investment Partnerships Program. This program, from the U.S. Department of Housing and Urban Development (HUD), provides federal block grants to state and local governments to create affordable housing for low-income households. States and localities use this money, often in partnership with a nonprofit housing agency, to purchase, rehabilitate, and sell homes to low- to moderate-income buyers. Fue put 3 percent down and was approved for a $75,000 HUD loan. Her $205,000 mortgage has a 4.25 percent interest rate. “She got a fantastic deal,” says Martinez, who notes that the state, city, and county of Los Angeles also offer first-time homebuyer incentives.
- American Dream Downpayment Initiative (ADDI). Another HUD initiative, ADDI allows grants to be given to participating jurisdictions to provide down payment assistance to low-to-mid-income families and uniformed employees such as policemen, firemen, sanitation, maintenance workers, and teachers.
- Habitat for Humanity. Habitat helps low-income people build and buy houses. Families are chosen according to their need, their ability to repay the no-profit and no-interest mortgage, and their willingness to work in partnership with Habitat. The average cost of a Habitat house in the United States is $60,000. Mortgage length varies from seven to 30 years.
- Local bond programs. Be sure to ask your lender what programs are available in your area, especially for first-time home buyers, or use the Internet to search for assistance from your state, county, or city. “Sometimes you can combine funds from several sources, and sweeten the pot even more,” says Martinez.
Because of the sheer number of programs available, experts recommend asking your lender or real estate agent for recommendations. While each loan type and assistance program will have its own qualification guidelines, they’re worth looking into if you are struggling to save for a down payment.
Otherwise, there’s always mom and dad.