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Whether you’re planning to upgrade from one home to another, or are buying a home for the first time, strategizing and saving for a down payment will be on your mind (or should be). But just because it’s important and possibly challenging, doesn’t mean it has to be stressful. If you have a plan and know your options, it can become much easier. If you’re in the market for a new home this year, or planning for the future, here are just some of the basics we think you should know:
Why is 20% down the standard?
Simply put, because it saves you money. This is the sweet spot where lenders prefer you to be, where the best rates are, no Private Mortgage Insurance is required, and most important - your payments will be lowest. Obviously if you can save 20% for a down payment, that’s the way to go.
So let’s assume you’ve done the basics. You’ve set a target price range for your new home, calculated how much you need to put down, determined your timeframe, and put a basic savings plan together - things like carving out some space in your budget for saving, maybe setting up an automatic savings, and trimming the fat (especially things like paying off credit cards or other high interest payments first). But have you considered every available avenue for maximizing your savings?
For example, if you have an IRA it can be a potential source of some helpful funds. You can withdraw up to $10,000 without penalty if you’re a first time buyer. So can your spouse if you’re married, meaning you can tap up to $20,000 this way. (And under current IRS laws, you don’t even have to be actually purchasing your first home. You can qualify if you or your spouse haven’t owned a principal residence any time time in the two years before the new purchase.) If you don’t have an IRA, but have a company 401k, you can always consider borrowing against it for some extra down payment funds. Unlike the IRA withdrawal, you’ll have to pay a 401k loan back, but at least this money (and the interest) goes back into your own savings.
What about loans with less than 20% down?
There are many options available for down payments of less than 20%. If you can put 10% down, you can still get a conventional loan but you’ll have to pay PMI, or Private Mortgage Insurance. This adds a small percentage premium to your loan and payments, but the upside is that once you reach 20% equity in your home, you can request that your lender cancel the PMI. (They’re required to cancel it automatically once you have 22% equity.)
If you have less than 10% to put down you still have far more options than many buyers realize. We’ve mentioned before that if you qualify for a loan backed by the Federal Housing Administration, you may be able to put down as little as 3.5%. In addition to FHA loans, there are VA loans for veterans that are available with 0% down! And although many buyers may have heard of these programs, many more are not aware of the nearly 2,300 state and local Down Payment Assistance programs available across the country. Depending on what city and state you’re in, they may offer low interest loans, tax credits and even grants. On average, down payment assistance saves the buyer almost $18,000 over the life of the loan (much more in higher priced markets), but many buyers don’t even look into whether they may qualify! There’s essentially free money out there, going unclaimed. Downpaymentresource.com is a good place to start if you’re looking for information on what programs may be available in your area.
Bottom line, when you’re strategizing a future down payment, talk to a lender or your REALTOR. Don’t forget that if you don’t have a loan officer yet, we can recommend one. Make sure that you’ve checked out all available avenues, done your homework, and put a plan in place. Don’t hesitate to ask us more about this! We’d love to have a conversation about your plans, or about any of your real estate needs.