The recommended down payment is 20 percent and if you can swing that, you’ll find more lenders to choose from, lower interest rates and you won’t pay private mortgage insurance (PMI).
However, there are lower down payment loans that may make sense. Veterans can get a zero-down VA loan without any PMI. Fannie Mae and Freddie Mac offer several loan options that only require 3 percent down. And if you qualify for an FHA loan, you can get in with just 3.5 percent down. Most traditional mortgages start with a minimum down payment of 5 percent, with PMI required.
Where’s the money going to come from? You have three options: Beg, Borrow or SAVE!
Gifts from parents are a common down payment plan for many first-time buyers. You’re need to document the gift to your lender and provide a letter from your parents confirming that it’s a gift and not a loan that you’ll need to repay. Be aware there are limits on gift funds–right now the annual gifting limit is $14,000 to an individual, per person. If your parents EACH make a gift to you, that’s $28,000. If you are married or buying the house with someone else, your generous parents can gift that much to each of you, bringing the total to $56,000 a year.
Down payment assistance programs are another option for help with your down payment. A knowledgeable mortgage lender can assess your financial situation and recommend a loan package that’s best for you.
It seems counterintuitive to go into debt to make a down payment on more debt. Consider this option carefully before committing to it and make certain you have a solid plan for repaying it.
You may have a non-legally binding “understanding” (as opposed to an actual loan agreement) to repay Mom and Dad for their down payment gift. If this is the case, make certain the pay back is something you can live with in the future. Finances and situations change, and your parents may need the money back sooner than expected.
Another option is to borrow from yourself by taking out a loan from your retirement funds. If you borrow from your 401(k) to make a down payment, you’ll be repaying yourself over time. However, if you change employers or lose your job, there will be financial repercussions. If you have an IRA, you can take up to $10,000 out without penalty to purchase a primary residence if you are a first-time home buyer. Most experts will advise you, however, that the risk is simply not worth the potential cost.
However, if you’re stretched so thin you really can’t put anything of substance toward savings account each month, you may have to face the fact that you’re not ready for homeownership in the foreseeable future. In that case, develop a long-term savings plan and stick to it.
Laura Van Meter stays on top of changes and trends in the mortgage market. She can recommend experienced lenders that offer exceptional customer service. Engage with a lender early in your home search, as they can determine your best options and present a path to homeownership for you.