How to Buy with Less than 20% Down

calculator with down payment signPerhaps you have heard you can buy a home with less than 20% down payment, but you have no idea where to begin. You are not alone. Many first time buyers lack the savings that a 20% down payment requirement demands, and most of them- about 70 %- say they don’t know what other options are available to assist them.

First, in case you have not done the math, 20 % adds up to a substantial amount needed in your savings account. If you look at a typical, four-bedroom, two-bathroom home priced at $303,000, a home buyer would need to put down slightly more than $60,000 in order to reach the 20% mark.

But, there are solutions that will allow you to buy without 20 % and breaking the bank:

  • FHA: The Federal Housing Administration (FHA) backs mortgages requiring as little as 3.5% in a down payment. Who is eligible? Anyone can apply, but it having fairly good credit is required. With the lower down payment comes more paperwork and the home will have to pass FHA standards during the home inspection. FHA buyers will also be required pay Private Mortgage Insurance (PMI) on the loan in addition to the principal and interest, which will raises the monthly payments. Essentially, PMI provides insurance for the lender in case you default on the loan, which is a greater financial risk if you put only 3.5% down.

  • Fannie Mae and Freddie Mac: These well know names in lending are offering loans requiring only 3% down payment required for a mortgage (versus their previous 5 percent).

  • VA Loans: The Department of Veteran's Affairs (VA) guarantees home loans with 0% down for current and former service members. The loans come with competitive interest rates and no private mortgage insurance premium, but borrowers could pay some fees at the time of closing.

  • The Department of Agriculture: This government agency offers a home loan program, with the mission to increase homeownership in more rural and less-populated areas. USDA loans do not require putting any money down, but there are eligibility requirements, including income and property size.

  • Assistance programs: There are more than 2,000 down payment assistance programs nationwide that can help potential buyers lower the amount of money required to close on their own home. There are limits on how much buyers can earn and still qualify and the homes need to be below a set sales price to qualify for the programs.

  • Gifted money: Sometimes a parent or grandparent has the funds available to help out with a young buyer’s down payment through gifted money. Anyone can be given up to $14,000 in one calendar year without triggering any taxes on that gift. Borrowers that go this route will have to provide their mortgage issuer with a letter from the giver that states the money doesn't have to be repaid, and may need to show their financial statements as well.

  • Withdraw from your IRA: Qualified first-time home buyers can also tap a traditional IRA account up to $10,000 without facing the 10% penalty, but you will be taxed on the amount withdrawn.

Your best course of action in locating a program or solution that is right for you is to enlist the help of your REALTOR, lender, and check on any local programs available at the city, county or state level. Also check into local housing finance agencies and non-profits for programs you may qualify for.

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