LOS ANGELES, CA – Demand for housing remains strong this spring season. Renters are finding buying a home may even, in some cases, be less than renting. If you don’t have a lot of cash but are looking to purchase your first home this year read on.
How Much of a Down Payment Will I Need?
A 20% down payment is often perceived as necessary to purchase a home, but it’s not a requirement and should not be seen as the only way to buy your first home. While putting down 20% can result in the lowest possible payment for the price range you’re targeting, it’s possible to buy a home with much less upfront.
You can purchase a home with zero down payment. Yes, it’s possible to buy a house with no money down. Alternatively, putting down 3% or more commonly 5%, can strengthen your offer.
Don’t overlook loans insured by the Federal Housing Administration (FHA), which allow for as little as a 3.5% down payment. These programs can help first-time buyers enter the housing market with a 30-year fixed-rate mortgage and no banking prepayment penalties or hidden terms.
What is a Mortgage? – Video
USDA-the US Department of Agriculture allows people in less industrialized areas to purchase a home without putting any money down. You’ll need the cash for closing costs, or you can ask the seller for the credit for closing costs.
Understanding Down Payment Options for Different Mortgage Loans
The loan allows a buyer to purchase a home up to the conforming loan limit, typically at the standard $417,000. No down payment is required as long as you qualify for the program. Additionally, a more traditional conventional mortgage loan program now offers a down payment as low as 3% of the purchase price. However, the qualifying standards for this 3% option are more stringent than those for the more typical 5% down payment option.
Investing 5% down can open up a wider range of home-buying opportunities because it presents a stronger financial profile on paper. This 5% down payment is applicable up to the maximum conforming loan size of $417,000. If your loan amount exceeds $417,000 for a single-family home, at least 10% down is required for conventional financing, as your loan is considered a conforming high balance, also known as a Jumbo loan.
Federal Housing Administration
The FHA (Federal Housing Administration) insures mortgage loans with as little as a 3.5 percent down payment up to the maximum conforming loan limit size. In many markets, the conforming loan limit exceeds $417,000; for example, in Sonoma County, it reaches up to $520,950.
The FHA has grown in popularity due to its lenient qualification requirements. It routinely approves applicants with challenging credit histories, including those who have experienced a short sale, foreclosure, or bankruptcy in recent years.
Your Cash Is Not Limited To Down Payment Funds Only, Closing Costs Must Also Be Budgeted
While it is true that you don’t need any money for a down payment to purchase a house, transactions that close in strong real estate markets typically involve buyers who can provide at least a 5 percent or 3.5 percent down payment.
Closing costs are another important consideration that extends beyond the down payment in securing a mortgage to buy a home. If you can manage the down payment, you can also request a seller credit for closing costs or even obtain gift money from family if finances are tight.
On average, total closing costs can amount to about 2.5 percent of the purchase price. Below is an overview of the range of total closing costs when purchasing with less than 20 percent down, along with some example purchase price points.
- For home purchases between $500,000-$600,000 you’ll need at least $10k for closing costs
- For purchases of homes between $300,000-$500,000 you’ll need at least 8-10k dollars for closing costs
- For home purchases from $150,000 to $300,000, you’ll need at least $7,200 for closing costs
Understanding Your Financial Options for Home Buying: A Guide to Procuring Funds for Your Purchase
These numbers should give you an approximation in helping you amass how much funds you have to spend on a home purchase. Acceptable sources for procuring cash to close on a house can be one or any of the following:
- Stocks
- Bonds
- IRA
- 401(k)
- Checking/ Savings
- Any form of money market account
- Retirement account
- Gift Money
- The key is the money needs to be documentable
Don’t have cash available in any of the above mentioned places? Even these places are still considered acceptable because they can be paper trailed:
- Security deposit refund on your current rental
- Tax Refund
- Any side monies you might have homes sitting in a safe can be used for the transaction as long as the money is deposited in a bank account and sits for 60 days to meet banking seasoning requirements
- Selling of personal property such as a car or motorcycle – these monies can be used as well too and will need to be documented with a bill of sale and a bank account matching the fund’s deposit
- A loan against a retirement account to come up with the down payment is also OK, as well. The lender will need to get borrowing terms of the 401(k) loan to purchase your first home
- Home Buying Tip: Line up the monies before you go house hunting. Have a statement showing proof of funds to close that you can submit with your pre-approval letter when you identify a house on which you won’t make an offer, especially if cash is tight.
Is Being a First-Time Homeowner a Problem?
This is someone who has not owned a home before in the last three years in the eyes of a mortgage lender. Additionally, the first-time homebuyer tax benefits and incentives have long since expired from years when the federal government was trying to bolster homeownership in leaner economic times.
The ability to purchase a home as a first-time buyer in today’s real estate market means working with a traditional mortgage loan program and having money in the bank to best position yourself for not only being responsible as a home borrower but also demonstrating you have the merit and capacity to purchase a home.
