What You Need To Know About Mortgage Down Payment
Traditionally, you need to shell out between 10 to 20 percent of the home price as down payment before you can buy a property. This is seen by many as a huge stumbling block in homeownership.
Is the 20 percent down payment mandatory? Let’s answer this question and tackle other things you need to know about mortgage down payment.
Why 20 Percent?
Let’s say that the total loan amount is $150,000. You will have to pay $30,000 for down payment. This amount equals 20 percent of the home value. If you think about it, that is a huge deal of money to pay upfront. It may take you months or even years to save up for it.
We’re all aware of the 20 percent down payment requirement for conventional loans. Mortgage lenders impose this on borrowers as a way of protecting themselves.
They’ve found out that if a borrower spends a significant amount of money as down payment, it’s less likely that the homebuyer will default on the loan. It also protects them by not loaning out the full value of the property, thus reducing the risk for financial loss.
If you simply can’t come up with this money yourself, is this going to be the end of your homeownership dreams? Is the 20 percent down payment a strict prerequisite in getting a mortgage?
The answer is no. There are other home loan programs which allow a down payment that’s less than 20 percent of the home value. In fact, there are some programs offering 100 percent financing. For those who can’t qualify for zero down payment mortgage programs, there are alternative down payment sources that can help offset the costs.
Alternative Ways to Get a Mortgage if You Don’t have Money for the Down Payment
Look for Programs Offering 100 Percent Financing
Some federal home financing programs offer zero down payment. First is the USDA loan. It provides low- to moderate-income borrowers access to credit in purchasing or refinancing a house.
Aside from the 100 percent financing, the loan is known for its lenient requirements. To qualify, most lenders require a credit score of 620. But if you’re really eager, it’s possible to find a lender that offers the same loan for a score as low as 580. You just have to shop earnestly.
Another government-backed loan is the VA home loan. It is part of the benefits veterans and active duty Military are eligible for. It is known for its flexible qualifying guidelines. However, it is more known for its zero down payment option.
While the VA home loan doesn’t impose a standard income threshold for a borrower to qualify, it has a residual income requirement. The VA wants to make sure that the homebuyer has enough money to meet for his/her major financial obligations and still have enough to covers his/her needs and day-to-day spendings.
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Look for Down Payment Assistance Programs
There are many down payment assistance programs which can cover a portion or the full amount of the down payment. This assistance fund may come as a silent second mortgage, a grant or a Mortgage Credit Certificate.
A silent second mortgage is a zero-interest loan that can be used to cover the down payment and/or closing costs. This assistance loan is only payable once the first mortgage is completely repaid. Moreover, some silent second mortgages are forgivable if the homeowner meets certain conditions set by the assistance provider.
Grants are simply “no strings attached” assistance. The homebuyer who receives the funding is not obliged to repay the money. They are usually available for low- to moderate- income homebuyers who deserve a house but couldn’t buy one because of the inability to pay the down payment.
Mortgage Credit Certificates or MCCs are tax credits which can help homebuyers get a mortgage with more favorable terms. An MCC can be used to offset a portion of the mortgage’s interest, thus increasing the buyer’s money. Some MCCs can be used in combination with an assistance loan or a grant.
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Using Cash Gifts
You can also make use of cash gifts to pay for the down payment. If you have a family member or a friend who is very eager to help you out, they can help through money presents. Tax laws allow monetary gifts to be non-taxable so long as it meets the IRS guidelines.
If someone is willing to pay the down payment for you, don’t be shy. Take advantage of it. Just make sure that if you use such fund, you can provide a written legal proof that it truly is a gift and not a loan. If this money has to be repaid, it can’t qualify as a cash gift and can’t be used towards the down payment.
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Remember that a down payment is important because it raises the home equity and allows you to get a mortgage with more favorable rates and terms.
Certainly, there are many solutions to your down payment struggles. You just have to explore other down payment options and understand how they work. Doing so will help you find a program that meets your needs.
If you want to learn more about the available down payment assistance programs, you can talk to a lender near you. They will be willing to assist you in finding a program that will complement your mortgage well. Since they are experts in the mortgage field, they know what assistance programs will work on your situation.DPAsearch.com can also help you look for local, statewide or nationwide down payment assistance programs, and connect you with an assistance provider. You can do with just a few easy steps. Now that you’ve learned more about how a mortgage down payment works, you can begin your search today.