True Homes has found that down payments can be the biggest barrier when it comes to shopping for a new home. It doesn’t have to be that way. Keep reading for savings tips and home financing tips that can get you into a new home faster than you expected.
How much do buyers typically save for down payments?
The dollar amount varies, of course, but the average down payment percentage for first-time buyers is 6%. This is far lower than the 20% many homebuying tips will say you need to save.
Twenty percent is typically recommended because it is the minimum amount that is considered safest for lenders. When buyers pay less down, they often incur costs for mortgage insurance premiums, which protect the lender in case of default. These premiums are typically added to the monthly mortgage payment, though some programs also require some payment up front.
In an environment where home prices are rising and interest rates may rise, it can cost less to buy early and pay mortgage insurance than to buy later when prices and borrowing costs are higher. Not only will you avoid paying more in the long run, but rising home values also mean your home is gaining equity during those extra months you would have spent saving for a larger down payment.
How low can down payments go?
Down payments can go as low as zero!
VA programs (for qualified veterans) and USDA programs often do not require down payments at all. USDA loans are available to first-time homebuyers who meet income requirements in certain rural areas. Many homebuyers are often surprised that suburban areas of their favorite cities may qualify as rural under USDA guidelines.
Otherwise, conventional loans can accept down payments as low as 3%, and FHA loans (which can accommodate lower credit scores) offer a 3.5% down payment option.
Many states also offer assistance with down payments. While home financing tips often leave out this step, True Homes has found that taking the time to explore state and non-profit program offerings often pays off, even when home buyers aren’t expecting it.
Savings Tips to Get You in Your Home Faster
Home buyers may not need to start from scratch when saving for down payments. First-time buyers may be able to tap into certain retirement funds without penalty, though it’s wise to talk to your tax advisor first.
Buyers can also pause deposits into retirement savings while building up a down payment fund. Diverting these funds to a home investment can pay off in the long run, since homes have proven to gain value over time.
True Homes has seen some homebuyers sell possessions to raise money for their down payments, too. It’s important to keep records of these transactions in case future lenders want to view the source of funds later, especially if the sale occurs within three months or so of your purchase. (Underwriters will want to ensure any funds added to your accounts are not borrowed.)
Many loan programs allow buyers to use gift funds toward their down payments. If you’re lucky enough to benefit from a gift, these funds will need to be accompanied by documentation from the giver showing that no repayment is expected.
Another tip: If you have high interest debt, try to pay it down or transfer balances to a lower-interest option. Consumer interest is an expense you may not see when you’re planning your budget, but it can eat away at your income very quickly.
At True Homes’ communities, we offer new homes to fit most any budget. Even buyers who start with small down payments can find options for the space and finishes they crave. And when it comes to home financing tips and savings tips, we’ve “been there and done that.” Let us guide you on the way to your homeownership dreams!