Down Payments and Home Loans – Redfin

Preparing for a down payment can seem complicated or even daunting. However, with some guidance, education, and hard work, down payments are achievable and easy to understand. You may even be able to save money or obtain a down payment assistance grant, loan or another type of funding. Each section of this guide will help you navigate down payments, down payment assistance programs, and first time home buyer questions.

Section 1: Down Payments and Home Loans

Section 2: Down Payment Assistance Programs

Section 3: First Time Home Buyer FAQ

How much should I save before buying a house?

When you’re buying a house, you’ll need to plan for several payments that vary from buyer to buyer. Some of these costs include a down payment, inspection fees, appraisal fees, earnest money, and closing costs. A down payment percentage varies and closing costs usually fall between 2 percent and 5 percent of a home’s sales price. Other costs associated with homeownership can include taxes and insurance (which are often, but not always, included in your monthly mortgage payment).

Using a down payment assistance program or a loan that requires a lower down payment will affect the amount of money you need to save. It’s usually best to talk to your lender about what you can afford and how much you should save before you commit to a plan.

Is a 20% down payment still standard?

While most lenders would like you to put down a 20 percent down payment, it’s not necessarily “standard.” There are thousands of loan products available, and each has its own benefits and drawbacks – but many of them require less than a 20 percent down payment.

Some of the most common loan products that require you to put less than 20 percent down on a home’s sales price include:

  • VA loans, which require no down payment at all
  • USDA Rural Development loans, which don’t require a down payment
  • FHA loans, which require at least a 3.5 percent down payment

If you don’t have enough money for a down payment of 20 percent of a home’s sales price, your lender might be able to find a program that helps you. These programs are designed to help people who can’t enter the housing market because they simply don’t have a large amount of cash in savings.

How can I buy a home without a 20% down payment?

You don’t always have to buy a home with a 20 percent down payment. There are several loan programs that only require you to put down 3.5 or 5 percent of a home’s purchase price; there are even a few that require nothing down.

You can also buy a home without a 20 percent down payment by paying for private mortgage insurance, or PMI. Private mortgage insurance protects your lender if you stop making loan payments; the insurer repays the lender for its loss, which lets the lender be more confident about lending to you. Usually, you can stop paying for private mortgage insurance once you’ve built 20 percent equity in the home. For example, if you’re buying a $100,000 home with nothing down, you can stop paying for private mortgage insurance once your principal (the amount you owe the bank, not counting interest) is down to $80,000.

Can I buy a home with only 5% down payment?

You don’t have to come up with a full 20 percent down payment to buy a home. In fact, conventional loans only require buyers to make a minimum 5 percent down payment on the home’s sales price. However, if you choose to put down 5 percent (or any amount less than 20 percent) of the home’s sales price, you’ll be required to buy private mortgage insurance, or PMI. PMI protects your lender if you stop making your mortgage payments (the insurer will pay the lender for its loss using some of the money you paid into it).

There are some mortgage products that allow you to put down 5 percent or less without paying private mortgage insurance, such as VA loans and some USDA loans. However, as a general rule, you’ll have to pay PMI until you’ve built 20 percent equity in the home.

How do I get a down payment for a first-time home purchase?

There are three things you can do to make saving up for a down payment a little easier:

  • Apply for down payment assistance: Research and apply for grants, loans and other programs that can help you get the funds you need.
  • Ask for help. Most lenders allow you to use gifted money to cover your down payment as long as you meet a few requirements. In many cases, the money has to come from people who are related to you (or who you intend to marry), and it must be a gift – not a loan – with documentation to prove it. That might include a letter from the person who gave you the money that explains what it’s for, as well as a copy of his or her bank statement. Make sure the person who’s giving you the money consults with a tax professional first, though, because there’s a gift tax that applies to certain sums.
  • Dip into retirement savings. If you have an IRA, the Internal Revenue Service allows you to withdraw up to $10,000 from an IRA for a down payment on a home without paying the early withdrawal penalty. You’ll still have to pay regular income tax on the money, and you will be shrinking your IRA, so it’s best to use this as a last resort – and only after you’ve consulted with a tax professional because we can’t give you tax advice. There are also options to borrow from your 401K without penalty.

If you have to save for a down payment, try to commit a certain amount of money each month or each paycheck to your savings. Make it as important as paying the rent or the electricity bill and remember that you may have to skimp in other areas, like dining out or entertainment.

What are ways I can save money to eventually put a down payment on a house?

Saving money isn’t always easy, but if you’re putting away cash to use as a down payment on a house of your own, it’s definitely rewarding. Smart savers employ strategies like these:

  • Cut out unnecessary expenditures: Cancel a daily trip to a coffee shop or subscription services you don’t really use and redirect that cash to a savings account.
  • Make monthly payments to a savings account: Treat those payments as no-fail missions just like the rent and electricity bills. You may even be able to set up a direct deposit into your savings account through your employer.
  • Reduce high-interest credit card debt: Either take out a personal debt consolidation loan with a lower interest rate or pay down balances significantly. Start with the highest interest card and work your way down. Don’t close the card, though, because doing so could affect your credit score.
  • Sell some of your investments: While it feels like a loss, what you’re really doing is converting one investment into another – a home of your own.

While it can be tough, it’s also rewarding. For most people, it makes sense to save money and look for down payment assistance programs that make buying a home easier.

Smart savings strategy: Even out the difference between your current rent payments and your future mortgage payment. For example, if you’re paying $800 per month in rent now, but when you buy a home you’ll be paying $1,000 per month for your mortgage, plus $100 for the increase in utilities, taxes and insurance, stash away the amount of the increase each month. This does two things: it gives you a way to try out your new mortgage payments within your budget and it gives you a definite target to put into savings each month.

Can I buy a home with bad credit?

You can buy a home with bad credit, but remember that you won’t be eligible for the same interest rates or terms that you would be if your credit was better.

Many conventional loan programs require you to have a minimum credit score or they won’t approve you at all. The FHA loan requirement is 580 to qualify for a 3.5-percent-down loan and 500 to qualify for a 10-percent-down loan, while the VA has no individual credit score threshold (although many lenders do).

That’s why you should make as many improvements to your credit as you can before you apply for a mortgage loan.

Start by requesting a free copy of your credit report, which everyone is entitled to receive thanks to the Federal Trade Commission, through AnnualCreditReport.com. If you find any errors, which are more common than you may think, dispute them right away.

Then, look at your balances versus the amount of credit you have; lenders want to see that you’re not using the full amount of your available credit, so do what you can to pay down balances. Make all your payments on time, too, because your payment history has a lot to do with your credit score.

Can I buy a house without a job?

While it is possible to buy a house without a job, you may not qualify for lower interest rates and better loan terms if you can’t prove your income. You can apply for:

  • A no-documentation home loan: These loans are designed to provide loans to people whose income is difficult to verify, such as those who are self-employed or have other sources of income.
  • A no-ratio loan: A no-ratio loan can be beneficial if you have a lot of assets because the lender will look at the value of your assets instead of your income to make a lending decision.

You might also think about showing proof of income from other sources, like child support, trust fund payments or stock dividends. For some people, the answer is a co-signer; the lender will consider his or her income as well as yours. Finally, owner financing may be an option. In owner financing, you make payments directly to the owner of the home rather than to a lender.

Can I buy a house without a mortgage?

Some people are able to buy a house without a mortgage, either by saving the cash to buy a home outright or by using seller financing.

Seller financing, which is commonly called owner financing, occurs when you agree to pay the home’s owner a down payment and make monthly payments. You’ll sign a promissory note saying that you’ll repay the loan and the seller signs over the deed to the house. You technically own the house, but the seller is technically your lender – and that means the seller can repossess if you don’t pay. Usually, seller financing is a short-term agreement, typically spanning a term of three and five years, and there’s a balloon payment due to the seller for the rest of the money at the end of the term. At that time, you can either apply for conventional financing or give the seller cash to “square up.”

Should I pay off my debt before applying for FHA loan?

Before you apply for any loan, you should pay off as much debt as you can. Paying off or paying down your debt will increase your credit score; with a higher credit score, you’ll qualify for lower interest rates and better loan terms. If you can, apply for a personal loan with a low-interest rate and pay off your cards. If that’s not possible, consider switching balances on high-interest cards to lower-interest cards so you can save money.

Pro tip: When you pay off a credit card, don’t close it. Keep it open so lenders can see that you have a good mix of credit types and that you have a low debt-to-income ratio.

Is it possible to buy a house with no down payment?

It is possible to buy a house with no down payment. However, in most cases, if you’re putting down less than 20 percent of a home’s sales price, you’ll have to pay for private mortgage insurance or PMI. PMI protects the lender if you default on your payments, and most lenders require it.

  • VA loan: The most widely known zero-down loan is the VA loan; if you’re borrowing as a veteran or service member of the U.S. Armed Forces, or a qualifying dependent of a veteran or service member, you do not have to put any money down, and you don’t have to purchase private mortgage insurance.
  • Navy Federal Credit Union: If you’re a member of Navy Federal Credit Union, which is only available to members of the military, some civilian employees of the military and the U.S. Department of Defense, and some qualifying family members, you are also eligible for a zero-down loan.
  • The U.S. Department of Agriculture: The USDA, offers a Rural Development loan. The Rural Development loan doesn’t require a downpayment, and there’s no PMI requirement. It’s primarily for first-time buyers, although there are a few exceptions. These USDA loans aren’t limited to farmland, so you should check with your lender if they’re available to you.

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