Getting Help With Your Down Payment

Just a few years ago, homebuyers could easily secure great mortgage deals with little or no money down. Today, however, things have changed, as lenders try to recover from the financial crisis of 2008 and avoid a repeat. Today it is not uncommon for lenders to demand down payments of 20% or more. For many would-be homebuyers, a 20% down payment is simply not an option. While seller-funded Down Payment Assistance programs (where sellers could contribute up to 6% to a buyer to cover down payment and/or closing costs on FHA loans) were eliminated following the signing of H.R. 3221 - The Housing and Economic Recovery Act of 2008 - there are still opportunities for getting help with a down payment. (For related reading, also take a look at Understanding Your Mortgage.)
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FHA Loans
The Federal Housing Administration (FHA) insures mortgages made by lenders that are approved to participate in The U.S. Department of Housing and Urban Development's (HUD) programs. Because the loans are insured against default for the FHA, it may be easier for some borrowers to qualify for a mortgage. Borrowers typically pay an upfront mortgage insurance premium (MIP) of 1% in addition to a small monthly fee. The upside of an FHA loan is its low down payment requirement: generally, home buyers can secure the loan with only a 3.5% down payment based on the sales price of the property, in some cases as low as $100 (the FHA requires borrowers to have a FICO credit score of 580 or higher to qualify for the low down payment).

Another perk with FHA insured mortgages is that down payments can come from a family member, employer, charitable organization or as a gift. While interest rates are not necessarily lower than other mortgages, the rates are competitive because the loans are insured by the federal government.

State and Local Housing Agencies
Some states offer financial assistance with down payments, particularly for first-time home buyers. Each state has its own program, including the type of assistance offered and specific eligibility requirements. For example, first-time homebuyers in North Carolina may be eligible for $8,000 in down payment assistance. The aid comes in the form of an interest-free, deferred second mortgage; the principle becomes due 30 years from the date of the loan unless the homebuyer sells, transfers, refinances or no longer uses the home as a principal residence.

Be warned, however, that some down payment assistance programs come with a catch. The Ohio Housing Finance Agency, for instance, offers grants in the amount of 2.5% of the home's purchase price, but participating homebuyers will have to pay a 0.5% higher mortgage interest rate in order to qualify.

To find out if your state offers any down payment assistance, check out the U.S. Department of Housing and Urban Development's list of state home buying programs here.

VA Home Loan
Eligible veterans may qualify for VA Guaranteed Home Loans which are made with no down payment unless one is required by the lender, or if the purchase price is greater than the property's reasonable value. A VA loan is made by private lenders, such as a banks, savings and loan firms and mortgage companies, and that is backed by the U.S. Department of Veterans Affairs (VA). These loans are available to veterans, active duty personnel, reservists/National Guard members, and in certain cases their surviving spouses. More information can be found on the United States Department of Veterans Affairs website: http://www.va.gov (rollover Veteran Services and select "Home Loans").

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Friends and Family
While it is never easy to ask family or friends for money, it may be a potential home buyer's only choice for coming up with the funds for a down payment. There is a catch to this, however. Many lenders currently shy away from money that comes easily; that is, money that the borrowers themselves did not earn. Instead, many lenders are looking for sweat equity - hard earned money that proves that the borrower is financially responsible and has a stake in the investment. Nevertheless, some lenders will accept down payments that stem from donations from friends, family, community peers and the like.

Save for a Down Payment
For many people with little savings and uncertain employment prospects, renting now and saving for a future down payment, may be an option. With a still-recovering economy, some would-be home buyers are either unqualified or cautiously avoiding the commitment of a long-term loan, and are renting instead. Saving for a down payment may take years, however, so a savings plan is a must. It is a good idea to create a separate savings account for this fund, and inquire if your employer can deposit your paycheck into multiple accounts (part into your regular savings/checking account, part into your down payment account). Of course, one of the best ways to save money is to eliminate any unnecessary expenses, especially recurring monthly expenses for services that you may not really need or use.

Saving money in certain IRAs may have advantages. Up to $10,000 can be withdrawn from an IRA for first-time homebuyer expenses, including a down payment, without incurring the normal 10% early withdrawal penalty.

The Bottom Line
Gone are the days where practically anybody could secure an easy mortgage with little or no money down. Government-backed loan programs, such as the VA and FHA Home loans, do offer borrowers the opportunity to secure mortgages with small or zero down payments. In addition, many state and local government agencies offer low-interest or low down payment loans. These loans, as well as saving for a down payment and soliciting the help of friends and family, offer help with making a down payment and securing a mortgage. (For additional reading, take a look at Understanding FHA Home Loans.)

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