Last Updated on June 1, 2023 by Bob Filipczak
A first time home buyer down payment is one of the big hurdles for folks just starting out on the home buying journey. It can stop some people from even going any further because they feel like they could never save up enough to make a down payment. Many still think that they need a 20% down payment on a home to get approved for a mortgage, even though the median down payment is much lower than that. If you are a first-time homebuyer, you may have a lot of questions. Here are some answers.
First Time Home Buyer Down Payment Facts
First off, a down payment is an up-front payment you make when you want to buy something, such as a new home, and need a loan to complete the purchase. The amount of your down payment is a fraction or percentage of the total cost of the home. It shows lenders, in this case the mortgage lenders, that you have some resources to finance the loan.
The average first time home buyer down payment amount is 6% (not 20%) of the price of the home you want to buy. The average first home costs $137,008, so that makes the down payment $8,220 (SELF). That should help put things in perspective.
You can negotiate your first time home buyer down payment with a loan officer. Here are some of the conditions around those negotiations.
- A lower down payment means you will be taking out a loan for more money, essentially the amount that will equal the cost of the home, minus your down payment. That means your monthly mortgage payment will be higher.
- A lower down payment may involve a higher interest rate for the mortgage. That will add up to owing more money over the course of the loan (most mortgages are either 15 years or 30 years).
- With a lower down payment, you will probably need to pay private mortgage insurance (PMI) for the first few years of the loan. That will average between $125 and $375 a month.
As you can see, negotiating a lower down payment means paying more to the lender over the long term, but sometimes that is the only way to get your foot in the door on homeownership.
Let’s look at some other options.
Are There No-Down-Payment Programs That Can Help Me Buy a Home?
Yes, various government programs exist to provide first time home buyer down payment assistance. These programs provide opportunities for reduced down payment requirements, sometimes even zero percent, making homeownership more accessible. Understanding the requirements of these programs can assist you in finding the right fit. Here are the most well-known loan programs:
VA Loans: This loan program is specifically reserved for armed forces personnel, including veterans and retired members from the Army, Navy, Marines, Air Force, Coast Guard, Space Force, National Guard, and Reserve. In some cases, surviving spouses of service members who were killed in the line of duty may also be eligible.
VA loans offer substantial benefits, such as the guarantee of no down payment, reduced mortgage interest rates, and the complete waiver of private mortgage insurance. These three benefits alone can result in significant upfront and long-term savings. For more information, a comprehensive list of VA loan benefits is available.
USDA Loans: This down payment assistance program caters to individuals interested in purchasing homes in rural areas. USDA loan guarantees also eliminate the need for a down payment. The loans are backed and insured by the USDA, while the funds themselves are provided by private lenders and banks.
The USDA defines “rural” as a town with a population of less than 35,000 people, encompassing 97% of the United States. To determine eligibility for a USDA loan guarantee in a specific area, you can consult their map. Income limitations apply to USDA loans, primarily targeting individuals with moderate or lower incomes. The eligibility criteria for these loans are clearly outlined.
FHA loans: An FHA home loan is a mortgage loan insured by the Federal Housing Administration and offered by approved lenders. These loan guarantees are designed for individuals with low to moderate incomes and low credit scores. The combination of a low down payment requirement and relaxed credit criteria makes the FHA loan guarantee ideal.
Some of the benefits include smaller down payments (minimum 3.5% of the total home loan, with potential variation for credit scores below 580), flexible approval requirements compared to conventional loans, and the ability to secure financing even with a low credit score. It’s important to note that the FHA program is not exclusive to first-time homebuyers; it is available to everyone.
Conventional mortgage loans are the loans most people get when they buy a house. Between 64% and 82% of all mortgages for homes are conventional. That’s why when people talk about mortgages, they are usually talking about conventional mortgages. Conventional mortgages are the ones that require a down payment in most cases. The size of that down payment will vary depending on the circumstances of the home buyer.
A conventional mortgage is a type of loan that is not insured or guaranteed by the federal government, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Instead, conventional loans are backed by private lenders, typically banks or mortgage companies. These loans offer flexibility in terms of loan amount, repayment period, and interest rates.
The Conventional 97
The Conventional 97 loan program is for first-time buyers and it only requires you to come up with a down payment as low as 3%. If you don’t have a lot of savings, this may be the lowest down payment for conventional loan you can get. There are four loan options.
- Fannie Mae HomeReady Loans are for low-income families who have a minimum credit score of at least 620. You also need to complete homebuyer counseling.
- Fannie Mae 97% LTC Standard Loans help first-time homebuyers with credit scores of 620 or better.
- Freddie Mac Home Possible Loans are for those with credit scores of 660 or higher, who live in underserved areas, or whose income is below a set limit.
- Freddie Mac Home One Loans are for first-time homebuyers who enroll in and complete a homebuyer education course. These loans are available for single-unit homes that will be the principal residence for the homebuyer.
Gift Funding for First Time Home Buyer Down Payment
In certain instances, home buyers may receive monetary gifts from family members or close friends to contribute towards their first time home buyer down payment. Whether this is permissible or not depends on the mortgage lender, so it’s essential to have an upfront discussion with them. Gift money is subject to specific guidelines and regulations, so conducting thorough research is advisable. Lenders often require a gift letter and supporting documentation to confirm that the funds are indeed a gift and not a loan.
You can Use Retirement Funds for a Down Payment
Using retirement funds is not ideal, so the best option for using a retirement fund or 401(K) is to borrow from the fund. If you remove the money and just spend it, you will incur a 10% penalty from the IRS unless you are older than 59 years old. If you borrow from the fund, however, you can pay yourself back over time and avoid the penalty.
If it’s an employer-sponsored retirement fund, it’s best to check with your employer about the rules for borrowing from the plan. Often, they will only let you borrow a portion of the retirement money depending on how you are vested.
When it comes to down payments, co-borrowing is another alternative worth considering. This involves partnering with a trusted individual, such as a family member or close friend, to jointly purchase a home. By pooling their resources, co-borrowers can combine their down payments, increasing their buying power and potentially achieving homeownership sooner. Unlike cosigning a loan, co-borrowing means that both individuals own a portion of the home, even if only one person resides there.
Earnest Money is Different From Your Down Payment
Earnest money serves as a deposit made by homebuyers to demonstrate their commitment and seriousness in acquiring a property. Typically, it is submitted early in the process when making an offer on a home and is held in an escrow account until the transaction is finalized.
Unlike a down payment, earnest money is a smaller sum, usually around 1-3% of the home’s purchase price. It acts as a gesture of good faith and is typically incorporated into the down payment or closing costs. While your earnest money can be counted towards your overall down payment, it becomes available only at the end of the transaction.
$3,000 Average Savings with Homes for Heroes
First-time home buyers who are also community heroes should consider Homes for Heroes for a couple of reasons. First, we have a network of mortgage specialists who are committed to helping community heroes like you. For more than 20 years, our specialists have been helping military service members, veterans, firefighters, EMS professionals, teachers and educators, healthcare professionals, and the law enforcement community buy, sell or refinance a home and save an average of $3,000 after closing. We help them find a home and then finance a home. Sign up today to speak with a member of our team to learn more about how we can help you get the mortgage and/or home you want, and save you good money in the process.
It’s our way of saying a collective thank you for all of your service to our communities.