Which mortgage is right for you? Part Six Home Buyer Down Payment Strategies for First Time Homebuyers, by Sharon Bartlett.

Which mortgage is right for you? Part VI

3 Home Buyer Down Payment Strategies for First Time Homebuyers

By Sharon Bartlett

By now you have a good idea of what mortgage is and how it works. If you are reading this I am glad that the idea is sinking and that you are learning. If your lender asks for over 5% downpayment, that’s sizeable enough to start stressing, I cannot emphasize enough that even in such situations, there’s help and we’ll cover the downpayment assistance programs in depth.

Assuming that your lender asks for a 20% down and going by the current national median home price of $374,900 that would mean you’d have to raise almost $80,000. That’s a lot! Even a 5% down is still too much for many people. Fortunately, there are options to help you make the necessary downpayment you need. Today, we are looking at some strategies that you can apply to come up with a downpayment.

LOW DOWNPAYMENT MORTGAGES FOR FIRST-TIME BUYERS

We talked about mortgages before and if you are a first-time buyer there are several options available to you. Here’s a more elaborate list.

LOAN TYPE DESCRIPTION MIN. DOWN PAYMENT

MIN. CREDIT SCORE MAX. DTI

FHA Government-insured mortgage for borrowers with low credit scores 3.5% 500 50%

Fannie Mae 97% LTV Standard At least one borrower must be a first-time homebuyer 3% 620 50%

Fannie Mae HomeReady For credit-worthy low-income borrowers 3%

Freddie Mac Home Possible Very-low-, low-, and moderate-income borrowers 3% 660 45%1

VA

Military service members (including qualified reservists) who meet length and character of service requirements, and their unmarried surviving spouses USDA Low- and very-low-income applicants in eligible rural areas 0%

0% 620 50%1

None None

None 41%2

Smaller downpayment requirement will allow you kick start your journey to homeownership faster.

But what’s the drawback of smaller down payment? Making a smaller down payment may prompt other expenses such as mortgage insurance. Mortgage insurance protects the lender against loans that default. This is a requirement on all FHA loans and on conventional loans that do not meet the 20% downpayment. On the other hand, VA loans have a funding fee which is usually rolled into the monthly mortgage payments. Additionally, lower downpayment means you will pay more in interest rates.

DOWN PAYMENT ASSISTANCE FROM THE STATE AND LOCAL GOVERNMENTS

Now that I have previously mentioned the downpayment programs, it’s only fair that we dig deeper. Many states and local municipalities have down payment programs started by government agencies, nonprofits, foundations, and even employers. The assistance comes in the form of grants, some in the form of zerointerest or forgivable loans. In most cases, it is a matter of ensuring that your home matches a program based on the home’s location and the price.

“There are some myths and misperceptions around this,” Chrane says. “Sometimes people think, ‘Oh, this is only for really low-cost housing, in targeted census tracts, distressed neighborhoods … and very low-income households. It’s much more widely available than that.”

DPA is often combined with other favorable mortgage interest rates or tax breaks. The applicants must first take first-time homebuyer classes which help in the preparation for successful homeownership.

The main drawback I find with DPAs is that there is a set maximum sale price and some have income limits. And as such, not all homebuyers will qualify.

CROWDFUNDING FOR A DOWNPAYMENT

There are popular crowdfunding sites like FeatherTheNest.com and HomeFundlt.com that let you build an online profile and raise money for a downpayment.

FeatherTheNest works like a gift registry where people can contribute to your downpayment or any other home needs and the funds will be funneled into a linked bank account. This is a service that works best, especially for newlyweds or engaged couples.

On the other hand, since HomeFundlt is a product of CMG Financial, to use the service, one has to first get prequalified for a mortgage from CMG Financial first. You can use the HomeFundlt crowdfunding tool to raise money for your downpayment. In addition, you can also have an opportunity to raise $1,500 in closing costs grant with free homebuyer education.

Is crowdfunding good? It depends. One thing I can caution you with with crowdfunding is that you watch out for the fees or obligations when using crowdfunding. With FeatherTheNest, the transaction and credit card processing fees total 7.9% plus 30 cents on each donation. The HomeFundlt does not charge fees but the limitation is that you have to use CMG Financial.

TAPPING INTO RETIREMENT SAVINGS

This is a viable option. Some first-time home buyers tap into retirement savings for downpayment. But if you are to walk down this path approach it with caution. There are rules that govern tapping your retirement money for use before the age of 59.5 and will vary by the type of account.

People with 401(k) accounts (employersponsored) can withdraw their money early. However, note that you will have to pay income taxes and an additional 10% tax penalty on your withdrawals. If your account allows loans, you must repay the loan with interest to avoid income taxes and possible penalties. Some of the 401(k) accounts give more than five years to repay the loan for a primary home. If for some reason you leave your job, the loan must be repaid or rolled into an eligible retirement account by the next tax filing deadline, failure to which it might attract taxes and penalties on the borrowed money.

The traditional IRA withdrawals for first-time home purchases are allowed up to $10,000. You will have to pay the income taxes on the withdrawn money, but you will not face any additional penalties if the money was used to buy or build a first-time home.

Lastly, for Roth IRA account holders, withdrawals are tax-free and do not attract any penalties if you are using the money to purchase your first home. The only condition is that you must be the account holder for at least five years.

Taking money from your retirement account isn’t the best strategy since it can set you back on long-term savings, making it hard for you to catch up. In addition, you might miss the chance to grow your money tax-free. I wouldn’t recommend this option as with many people, you might already be behind on your mortgage payments.