Do First Time Homebuyers Need a Down Payment?

Are you ready for the joy and financial stability of homeownership? The financial benefits of owning versus renting are great, but they do come with heightened responsibility. If you’re in the market to purchase your first home, you may be wondering how much of a down payment (if any) will be required to get started. It is possible to purchase a home with zero-down in today’s market, but that may or may not be the right choice for you. This blog will introduce you to several mortgage products that could be a good fit for a first-time buyer and will help you consider whether a down payment makes sense.

FHA Loans

The minimum down payment requirement for FHA loans is 3.5%. Many first time home buyers utilize the Department of Housing and Development’s (HUD’s) FHA program. It can be easier to qualify for an FHA-insured mortgage than a Conventional mortgage. Plus, the down payment requirement is lower for most borrowers.

Conventional Loans

The typical minimum down payment requirement for a Conventional loan is 5%. However, in unique cases it may be possible to obtain a Conventional loan with as little as a 3% down payment. To qualify for the lower down payment threshold, the applicant must be a first-time home buyer with income that falls under the cap for their area. Your loan officer can advise on whether you meet the criteria.

Buyers who obtain a Conventional loan with less than 20% down will be required to obtain private mortgage insurance (PMI).

VA Loans

VA loans are backed by the United States Department of Veteran’s Affairs and are only available to active-duty service members, veteran military service members, and some surviving spouses. VA loans usually do not require a down payment.

Down Payment Assistance Programs

Thousands of down payment assistance and other first time homebuyer programs exist. Some are available to a national audience, but many are supported by local not-for-profits and municipalities. The easiest way to start looking for programs near you is an internet search…but beware of bad actors! Legitimate homebuyer assistance programs will be able to provide reviews from existing home buyers and established lending institutions.          

Are you already working with a lender? Your loan officer is the best resource for first-time homebuyer programs. You might also contact your local housing authority (an organization that deals primarily with rental housing opportunities) for information on state and local programs for home buyers.

Down payment assistance comes in two basic forms: a loan taken alongside your mortgage or a grant. The loan team at Ruoff Home Mortgage can advise on the down payment assistance programs available in your area.

Closing Costs in Addition to the Down Payment

Even if you receive down payment assistance, it may not cover closing costs. Plan to save for these expenses. Your agent and loan officer can advise on the costs you will incur before and during closing, but plan to pay for an appraisal, title insurance, lender fees, closing fees, taxes, and insurance. You might also pay a brokerage fee, inspection costs, and survey fee. Specific geographic areas and other situations may necessitate additional expenses. It is a good rule of thumb to save at least $3,000 for closing and other costs in addition to your down payment requirement.

Some borrowers may need to pay off judgments or collections before a final loan approval is granted. Also, if your debt-to-income ratio is high, your loan officer may suggest paying down some of your revolving debt to obtain loan approval and/or to qualify for a more favorable interest rate. Most loan programs call for cash reserves (money in the bank) at the time of closing, so save more than you will need for all debts and expenses.

How to Start Saving

When you’re ready to start saving, begin with a budget. Good, old-fashioned budgeting is how fortunes are made and homes are purchased. Most household budgets are simple. You can start with a line-item spreadsheet listing all monthly expenses and the amount you expect to pay for each. Include a monthly savings goal as one of your “expenses.” Some savvy budgeters use apps like Mint, others just use a spreadsheet like Google Sheets or Microsoft Excel. At the end of the month, enter actual expenses next to the planned monthly expense to see if your household is at, over, or under budget. Next comes the important part. Consider whether all of your expenses were warranted and what you could do to devote a little more to your savings next time. Cost control builds wealth! Every dollar saved brings you closer to the goal of homeownership.

Saving takes discipline, but the effort is worth the reward. Even if you don’t know what your down payment requirement will be, start saving now to build good financial habits.