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Not long ago, no-down-payment loans were the height of fashion for homebuyers. But now that lenders have tightened their standards, borrowers once again are expected to "put some skin in the game," to use a favorite industry catchphrase.
That "skin" refers to the borrower's own cash, and it means down payments are definitely back in style.
The chief advantage of a down payment today is simply the ability to qualify for a loan, as only a handful of so-called zero-down loan programs still exist. Yet down payments have other benefits, too.
The more money you put down to buy a home, the smaller your monthly payments will be, explains Greg Gwizdz, the national sales manager at Wells Fargo Home Mortgage in Des Moines, Iowa.
A buyer's down payment becomes a homeowner's instant equity when the purchase closes, and that equity can be borrowed against with a home-equity loan or line of credit. Guidelines to qualify for these loans have become much stricter, however.
And, Gwizdz adds, many first-time homeowners are "surprised by the true cost of owning and maintaining their home." So they should keep some reserves rather than allocate every dollar to their down payment. Some loan programs require cash reserves for this reason.
Other benefits of a down payment include:
- Borrowing less money to buy the home.
- Shopping among more lenders, loan originators and loan products.
- Getting a lower interest rate.
- Paying less for mortgage insurance.
- Avoiding mortgage insurance altogether if the down payment is at least 20% of the home's purchase price.
How to get a down paymentMany homebuyers have difficulty coming up with a down payment. Here are a dozen ways to do it:
- Set up an automatic saving plan.
- Get a gift from your parents, grandparents, other relatives or friends.
- Sell a car, boat, motorcycle, collectibles or other assets.
- Liquidate stocks, mutual funds, savings bonds or other investments.
- Allocate your income tax refund.
- Take a loan from your 401(k) retirement plan and repay yourself with interest.
- Withdraw funds from your 401(k) plan, subject to taxes and penalties.
- Collect on a loan that you made to someone else.
- Get a bonus from your employer.
- Explore homebuyer programs for public servants if you qualify.
- Apply for a state or local government down-payment program.
- Use a private down-payment assistance program.
A down payment needs to be "sourced and seasoned," Gwizdz says. That means the lender needs to know how you obtained the funds and that you've had control of those funds for at least several months.
Gifts and seller's concessions are acceptable, up to the percentage allowed by the loan program, but borrowed money can't be used as a down payment, as it is debt that has to be repaid.
Government-backed programsTwo government-run programs are designed to aid homebuyers who haven't saved much for a down payment. The Federal Housing Administration offers mortgage insurance that allows qualified buyers to purchase a home with a 3% down payment, all of which may be a gift. The U.S. Department of Veterans Affairs offers a home-loan guarantee program that helps military veterans buy homes with no down payments.
Down-payment programs run by state and local housing authorities offer grants and low-interest deferred-payment loans to homebuyers, though the restrictions can be "pretty severe," says Ed Craine, the chief executive officer of Smith-Craine Finance, a mortgage company in San Francisco. Some programs require borrowers to live in a disadvantaged neighborhood. Others have income limitations, for example.
"The biggest problem tends to be that if you make enough money to qualify for a loan, you probably make too much money to get the down-payment assistance," Craine says.