Nov. 16, 2018.
Most homebuyers are put off by the thought of saving for a 20-percent down payment. But in today’s mortgage industry, that rule no longer always applies. Up to 61 percent of homebuyers paid 6 percent or less for their down payment. There are several mortgage programs with low- or no-down payment requirements, and buyers are keeping their options open. Some options make it possible to pull together the cash without having to save for months.
Of course, putting down a traditional 20-percent down payment is great for those who have it. Generally, the larger the down payment, the lower the mortgage will be. But few people have enough cash reserved to make a large down payment. There are some loan products that require less, like FHA’s minimum 3.5 percent down payment. These mortgage programs are attractive to the majority of first-time buyers — the same buyers who made an average 0 to 6 percent down payment when buying a house from 2016 to 2017, according to the November 2017 REALTORS® Confidence Index Survey. Interestingly, the number of first-time buyers who made a low down payment decreased from 70 percent in 2010, possibly because buyers often try to come up with extra cash upfront to lower their monthly mortgage payment. Below, you’ll find the helpful tips to make that happen.
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7 ways to pay for your down payment without breaking the bank
Because of credit card and student loan debt, one-third of first-time buyers take two years or longer to save up for a down payment. But you could own a home sooner than you think when you consider these cash-saving alternatives:
1. Get a larger tax refund.
Decrease the number of withholding exemptions you claim on your employer’s tax form and apply the refund to your down payment. You can use the TurboTax withholding calculator or work through it manually on the IRS page to increase your refund by tweaking your paycheck.
2. Borrow money.
Many borrowers ask relatives for money to help purchase a home. Tax laws will allow relatives to gift a certain amount without tax consequences. However, you should consult a tax professional to learn the maximum amount others can contribute. You could even ask relatives for an unsecured loan, and the rate would likely be less than what you would pay an official lending institution. The Consumer Financial Protection Bureau details what kinds of cash gifts can be used for down payments here, while strongly cautioning against removing tax-free funds from your retirement savings.
3. Directly deposit a portion of your paycheck into a savings account.
Two years may be the standard for many when saving for a down payment the old-fashioned way, i.e., setting aside a little each month. But Time Money estimates based on the median household income of $61,000 and an average home price of around $252,000, you could be eligible for an FHA loan with a minimum 3.5-percent down payment after saving 10 percent of your salary for just 18 months. If you’re able to contribute $200 every two weeks, you’d save $5,200 after a full year (excluding interest) and could qualify for a low-down payment loan program.
4. Sell your stuff online or at a garage sale.
Most people have more items in their home than they could possibly use. Take a careful inventory of your entire home, including your attic, all of your closets, and under your bed, and sell the items you no longer use. If you haven’t used something in a year, sell it. With Craigslist and popular online sell-and-swap apps like VarageSale, OfferUp, LetGo, and more, having an in-person garage sale may not even be necessary.
5. Ask the home seller to contribute.
If you pay the seller’s asking price, they might be willing to credit the closing costs, which can leave more funds free for your down payment. Talk to your lender first to find out your options and also read our guide to seller-paid closing costs here.
6. Look into government loans and other special programs.
Veterans and active military may qualify for a VA loan, which doesn’t require a down payment. There are also state and local affordable housing and assistance programs. Talk to your lender to find out more and also read our guide on low- and no-down payment mortgage programs here.
7. Get a second job.
Even temporary seasonal work during the summer or the holidays can help you save funds for a down payment. If you’re in need of inspiration for starting a side hustle, check out Entrepreneur’s 50-point list here, including ideas like online tutoring, mystery shopping, freelance graphic and web design, hair-selling (yes, really), and much more.
Is a no-cost home loan a better option? Here’s how to find out
With an attractive name like that, it’s no surprise that the demand for the no-cost mortgage surged in the early 1990s, back when mortgage rates were low and everyone and their neighbor was refinancing. The purpose of the no-cost loan is simple: It’s designed to keep your upfront costs minimal.
How it works
This is what’s going to happen if your lender brings a no-cost mortgage to the table. You, the borrower, won’t pay closing costs, loan points, appraisal fees, credit report fees, or other lender fees when you close. You will still be charged these fees, but you won’t be charged them at closing.
You will have to do one of two things to get this “no-cost” guarantee:
- Choose to lump closing costs into your total loan amount. For example, your new loan amount may become $202,500, including closing costs, bumped up from a $200,000 loan. Keep in mind that financing these costs (and adding to the loan amount) is only available for a mortgage refinance. Otherwise, on a purchase the seller could pay the closing costs, creating little-to-no upfront expenses for the buyer.
- Choose an interest rate increase of three- to seven-eights percent, varying by mortgage amount. A larger mortgage will reflect a smaller rate increase. So, you may not pay $2,500 at closing, and instead pay nothing, by slightly increasing your interest rate.
When a no-cost loan is a great idea
So far, so good — especially if you’re someone who moves often and needs to keep the upfront costs minimal. If you plan on staying in your home for only a few years, then paying a large amount of money at closing would make little sense.
To reiterate, you’ll only want to exchange your closing fees for a higher interest rate if you plan on moving in the near future. If you agree to a higher interest rate, it also helps to know that this mortgage interest can be tax-deductible. While it can vary by individual, planning to stay in a home for less than 5 to 7 years is the sweet spot recommendation for a no-cost loan.
When a no-cost loan is a terrible idea
For everyone else who’s buying a home to live in for the long haul, a no-cost loan may not be a better bet. If you’re planning to live in your home for longer than 5 to 7 years — what many lenders call the break-even point — then a lender will come out ahead with a no-cost mortgage. Agreeing to a higher interest rate over a long-term loan will fall in favor of the lender. Back in 2010, when the economy was still struggling, The New York Times wrote an interesting report on the “hidden cost” of the no-cost mortgage. As the Times pointed out, no-cost loans are appealing to buyers who are tight on cash since you don’t have to pay anything extra out-of-pocket.
As good as they sound, the bottom line is this: There’s a time and place to consider a no-cost loan, when you only plan to live in a house for a few short years. Any longer than that, and you’re wasting your money by agreeing to a higher interest rate.
Buying a house doesn’t have to be hard when you’re working with a loan officer who cares. Click here to find a Cornerstone loan officer near you who can answer the tough questions and make homebuying fly by fast.
For educational purposes only. Please contact your qualified professional for specific guidance.
Sources are deemed reliable but not guaranteed.