Anyone who has saved for a down payment for a home knows it’s tough – especially for first-time homebuyers.
“Renting felt like such a waste of money and didn’t help us build our own equity,” said Jasmine Lucero, 21, of Denver, Colorado. “I knew owning a home was in my future, but convincing my fiancé, who is the mathematical, practical one, was the hard part.”
Lucero’s fiancé, Chace Malone, didn’t think they had enough saved for a down payment. “He was having a hard time with the thought of buying a new home with our upcoming wedding – he said it was too much to take on, too complicated and would stress us out.”
Lucero, who works as an administrative assistant at a RE/MAX office, and Malone are not alone. In 2018, the National Association of Realtors (NAR) found that for 13 percent of first-time homebuyers, the most difficult step in the homebuying process was saving for a down payment.
But part of that difficulty may stem from not knowing what’s possible.
Some people have the misconception that a 20-percent down payment is required for a home purchase, when in reality, many home loan options exist that may be able to put consumers into a home for as little as 3 percent down. In fact, 77 percent of non-cash first-time homebuyers in 2018 purchased a property using a down payment of less than 20 percent.
“Mortgages are not one size fits all,” said Ward Morrison, President of Motto Franchising, LLC. “The right loan originator will understand your unique situation and work with you to find you the best option. Just like homeownership, the journey to a down payment looks different across the country based on local home prices, the types of loans you qualify for, competition and opportunities.”
Midwest: Educating First-Time Homebuyers
“It’s not uncommon for those in the mortgage and real estate industry to encounter first-time homebuyers who have questions about how down payments and mortgages work,” said Donna Deaton, Vice President of RE/MAX Victory in Liberty Township, Ohio. “Many homebuyers are shocked that they’re able to find loan options for as little as 3 percent down. Then they wonder why they didn’t start looking for a home sooner.”
Deaton added, “There may be options out there for almost every type of homebuyer. But buyers should prepare and do their research.” She also pointed out that loan options available to first-time homebuyers can vary widely by state.
Deaton suggests that buyers looking in rural areas learn more about USDA loans with income and purchase price limits. Some of these products are designed specifically for homebuyers with low or moderate incomes.
In some areas, grants are also available to first-time homebuyers on a first-come, first-served basis and offered for a limited time or until the grant funds are exhausted.
West Coast: Having an Experienced Real Estate Agent in Your Corner
San Francisco-based agent Alina Laguna with RE/MAX Futura explained that many San Francisco renters are packing up and moving to East Bay. “Houses there are still going for $400,000,” she said. “Many people are exiting the San Francisco market to afford a home and, while the homes are more affordable, it’s also very, very competitive.” In San Francisco, many buyers struggle to save 20 percent down, especially with the market’s median sales price of $1.6 million. Buyers dreaming about owning a home in a competitive, highly priced market can gain an edge by enlisting the help of a skilled real estate agent with experience in the area.
“I refer clients to an excellent mortgage professional who is very good at finding the right program for every single person,” said Laguna. “I had a client who had only 5 percent available for a down payment but had an excellent credit history with a very strong credit score. We submitted an offer with no contingencies, and it was accepted.”
Mountain States: FHA, VA and Other Loan Options
Across the Mountain West – including Arizona, New Mexico, Colorado, Utah, Idaho and Montana – home values continue to increase. The good news, though, is that inventory is finally bouncing back after being razor thin for years.
For RE/MAX Alliance owner Phil Shell, who has offices in Arvada and Golden, Colorado, it’s important to know a buyer’s profile.
“If you’re a first-time homebuyer, you could consider a Federal Housing Administration (FHA) loan. It’s specifically designed to help with down payment relief and only requires a down payment of 3.5 percent. There are no income restrictions and generally no geographic restrictions for buyers, but you need a credit score of at least 580.”
Shell added that if a buyer served in the military, the VA Home Loans program has a zero-percent down payment. “Nothing. Nada,” he said. “In some cases, the veteran can ask the seller to pay the closing costs during contract negotiations, allowing them to get into a home with absolutely nothing out of pocket.”
In addition, there are many programs in most major cities, ranging from local municipal grants to programs through a state housing authority. These programs generally have income restrictions and, in some cases, are focused on certain geographic areas. They may also require potential homebuyers to attend education courses. It’s important to note that some grants and programs do require homebuyers to repay the down payment assistance; it can be the equivalent of an interest-free loan for the down payment.
South: The Importance of a Good Lender
“How much home do I qualify for?” is the question most often posed to loan originator Karma Herzfeld with Motto Mortgage Alliance in Little Rock, Arkansas.
“I always answer that question with a question of my own. ‘How much of a monthly payment are you comfortable with?’” said Herzfeld. “Borrowers should do the math on how much monthly income they have left over after all of their expenses are paid each month. I can work with them to help them determine an amount.”
According to Herzfeld, a simple monthly budget works. “I always recommend my borrowers make sure to include discretionary spending like medical emergencies, meals, entertainment and travel so that they don’t end up ‘house poor’ with most of their income tied up in monthly mortgage payments and nothing left for other things,” she said.
In general, Herzfeld estimates that less than 10 percent of her clients put 20 percent down on a home. “Usually, only second- or third-time homebuyers who have built up equity in their current homes put 20 percent down on a new home,” she said. “They’re able to use the equity in their homes to turn a profit and use that as a down payment on their next home.”
Buyers should keep in mind that mortgage insurance is often required when putting down less than 20 percent. Having good credit and verified income are also important for qualifying for loan options with low down payments.
After attending a first-time homebuying class, Lucero and Malone qualified for a conventional loan that only required a 1 percent down payment. “It wasn’t a difficult process – we had a great crew and it was very smooth,” said Lucero. “We are already talking about moving to a bigger house – we could take the equity in this house, use it as an investment property and give ourselves an upgrade.”