For the majority of the people taking up home loans, down payment can be a hurdle. Making a down payment for your new home is easier said than done. First time home buyers usually save up money for down payment along with other financial strategies. The best and professional lenders will help you in eliminating your down payment hurdle without risking your finances in the future. Therefore, first time buyers should adopt some down payment strategies that will save them from paying a hefty number of down payments.

This article lists down some of the options you can avail but only after evaluating their benefits and disadvantages.

Low-Down Payment Mortgages

Normally the lenders prefer that borrowers pay 20% of the down payment but for many borrowers’ low-down payment mortgages are also available.

VA Loans:

VA Loans are backed by the US Department of Veteran Affairs and offer 0% down payments.

USDA Loans:

USDA loans are backed by the US Department of Agriculture and offer 0% down payment to the borrowers.

FHA Loans:

FHA loans are the loans backed by Federal Housing Administration which offer down payments as low as 3.5%.

Conventional Loans:

Conventional loans are the loans which are although not backed by the government but still offer down payments as low as 3% if the first-time home buyers have good credit scores.

When a buyer is able to get a loan with lower down payment, they may enable you to buy a home and start to build home equity.

However, the drawbacks of low-down payment loans are that they incur you extra expenses. All FHA loans and conventional require mortgage insurance if the down payment is less than 20%. The mortgage insurance protects the lenders in case the borrower defaults. The loans offered by the Department of Veteran Affairs (VA) have a funding fee which can also be added into your monthly mortgage payments. Moreover, a lower down payment means that you will have to pay a higher rate of interests.

>>More: FHA Loans: What is an FHA Cash Out Refinance Home Loan

State and Local Down Payment Assistance Programs

Many states have down payment assistance programs which are executed by foundations, non-profits, government agencies, and employers. The payment as a result of these assistance programs comes in the form of grants or zero-interest loans and forgivable loans. The geographic niche of the program can be as big as the nation or as narrow as a specific city. The state and local down payment assistance programs require matching a property to the program on the basis of home’s location and price. The down payment assistance programs are usually combined with mortgage interest rates which are favorable or tax breaks.

However, there are some drawbacks of state and local down payment assistance programs. You should always consider the drawback as well before choosing an option. For example, these programs normally set the highest sale price which usually do not fit in the income limits. This means some buyers cannot qualify for this program. However, it is still better to check out these programs in your state.

Down Payment Gifts and Loans from Family

This is also one of the strategies that first-time home buyers should consider if applicable. It is not something new that the first-time home buyers take help from their family members. The first-time home buyers of age 28 or lesser mostly make use of the gifts from their family member or a friend to make down payments. According to a report from National Association of Realtors 28% of the buyers of age 28 and younger and 21% of the buyers aged 29 or 30 have used a gift for making down payments.

Lenders accept gifts as down payments but using gifts for a down payment requires much more than just depositing a check. The lender requires complete documentation in case the borrower is using a gift as a down payment in order to satisfy the lending requirements set by the lender. The donors will have to provide a document in their writing stating not only that they made the gift but also their financial ability to do so. The donor has to provide their bank statements as a proof along with a letter which will confirm that the donation made to the borrower is a gift and not a loan. This is because if the donation is something that has to be paid back, then the lender has to take this into account while calculating the borrower’s debt. This will make sure whether they still qualify or not.

Just like other down payment strategies, this also has a drawback. Although using a gift from a family member for their down payment makes it easier, buyers who only rely on gifts from family members might be not prepared for the complete cost of owning the house.

Crowdfunding a Down Payment

There are many websites like HomeFundIt.com which allows the borrowers to make an online profile and raise funds for the down payment. FeatherTheNest.com is also one such website which allows borrowers to make an online account, register themselves and raise funds. This website works as a gift registry where the contributions made can be added into a linked bank account.

However, there might be some drawbacks which you need to check out. Before using this strategy, watch out for the fees or any kind of obligations involved. For example, FeatherTheNest.com charges 7.5% credit card transactions plus 30 cents on each donation.

Retirement Account Withdrawals or Loans

First-time home buyers can also make use of their retirement savings for making a down payment. However, this option must be used by the borrower carefully. Before the age of 59.5, the borrowers who plan to tap into their retirement savings have to follow the rules and keep in mind the consequences.

  1. The Employer sponsored plans 401 (k) might allow for loans or early withdrawals. You have to pay taxes on your income and an additional penalty of 10% if you plan to withdraw early. If you are taking out a loan, then you will have to pay the interest rate in order to avoid income taxes and penalties. For a primary home, there are some 401 (k) loans which will provide you with a time of 5 years to repay a loan. However, if you leave your job, your loan will be added into your retirement account as it still has to be paid back until the next tax filing date. Otherwise, you will incur penalty and will have to pay taxes on the money borrowed.
  2. The traditional IRA withdrawals are allowed for the first-time house purchases up to $10,000. You will not be paying any additional penalty if you are using the money to buy your first primary home but will be paying income taxes on the money withdrawn.
  3. Roth IRA withdrawals are completely tax-free and comes without penalty provided if you have an account for at least 5 years.

Majority of the financial planners do not recommend this strategy because the borrower is already falling behind their retirement savings. The downside of this strategy is that using money from your retirement savings will make it hard for you to catch up on savings. Moreover, there are chances to miss out on tax-free growth on any other amount of money you borrow.

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