Owning your own home may be a cornerstone of the American Dream, but it’s a dream deferred for many people. Rising home prices – up 6.3% over the last year — are making it difficult for many would-be buyers to save enough for a 20% down payment.
Nearly 30% of renters Bankrate surveyed said they were still writing monthly checks to their landlord because they couldn’t afford a down payment to buy a home of their own. Those hesitant buyers would need to come up with more than $50,000 to put down 20% on a property that cost $253,500, the median selling price for homes in the U.S. in August 2017.
Frustrated renters may wonder how buyers are able to come up with hefty down payments for their first place. Well, chances are, they’re not. Though some first-time homeowners are diligent savers who can come up with a sizable down payment, many buyers put way less than 20% down. The average down payment was 13% in July 2016, MarketWatch reported.
While personal finance experts often recommend a large down payment, since it gives you instant equity in your home, means a smaller monthly payment, and allows you to avoid mortgage insurance, there are plenty of paths to home ownership that don’t involve writing a huge check to your lender right off the bat. That’s good news for buyers, especially those in expensive areas where saving $50,000 or more for a home may seem like an impossible hurdle.
From FHA loans to down payment grants, here are six ways to buy a home, even if you don’t have a lot of money in savings.
1. Get a FHA loan
When people can’t afford a big down payment, they often turn to Federal Housing Administration (FHA) loans, which make up 22% percent of all mortgages in the U.S. With a FHA-backed mortgage, you can put as little as 3.5% down. Interest rates are lower and buyers with less-than-perfect credit can still get approved.
The downside of an FHA loan is mortgage insurance, which protects your lender in case you default on your loan. You’ll pay 1.75% of the home’s value up front, along with a monthly insurance premium. You’re stuck with that premium for the life of your loan (unlike a conventional mortgage where you can cancel mortgage insurance once you have enough equity in the property). However, you may be able to refinance your FHA loan and get out of paying mortgage insurance once you have sufficient equity in your home.
2. Check out other government programs
FHA loans are the best-known of the government’s mortgage assistance programs, but they’re not the only option. The U.S. Department of Agriculture’s loan program helps people buy homes in eligible rural areas with no down payment. You will have to pay mortgage insurance premiums, but the amount is typically less than a similar FHA loan, and interest rates are usually lower as well. The Department of Veterans Affairs backs VA loans, which allow veterans to buy homes with no money down and no mortgage insurance.
3. Consider a low-money-down mortgage
The government isn’t the only game in town when it comes to low-money-down mortgages. Some banks are reluctant to originate FHA loans, given the costs involved, and have begun to roll out their own products to attract first-time home buyers.
Wells Fargo and JPMorgan Chase are among the banks offering loans with as little as 3% down, and Quicken Loans has rolled out 1% down loans (it grants 2% to borrowers to get to a 3% down payment). You’ll need good credit to qualify and you’ll have to carry private mortgage insurance (PMI), which could add hundreds of dollars to your monthly payment. (You can usually cancel PMI once you’ve paid off 20% of your loan). A handful of lenders have also introduced low-down-payment loans without mortgage insurance, including Bank of America’s Affordable Loan Solution, but you can expect to pay a higher interest rate for these loans.
4. Apply for a piggyback mortgage
Buyers who want to avoid PMI but can’t afford to put 20% down may consider a piggyback mortgage, or taking out a second loan to cover part of the down payment. You might have a conventional mortgage for 80% of the home’s value, a second piggyback mortgage for 10% of the home’s value, and a 10% down payment.
The second mortgage is really a home equity line of credit (HELOC). Generally, you need good credit to get this kind of loan, and the interest will usually be higher and may fluctuate with market rates, Realtor.com explained. Buyers may be more likely to use a piggyback mortgage if the home they want costs more than the conforming loan limit in their area ($417,000 in most of the U.S.). These jumbo loans usually require a large down payment and a piggyback mortgage can help buyers get to that number.
5. Find payment assistance
Free money sounds too good to be true, but there are actually people willing to give you cash to buy a home. Down payment grants help low- and middle-income Americans bridge the gap between their savings and the amount needed for a down payment. In some cases, you can can qualify for thousands of dollars in assistance. First-time buyers in Illinois can get $7,500 in down payment help. Ohio’s Your Choice! Down Payment Assistance covers 2.5% or 5% of a new home’s purchase price. Many other states and some cities have similar programs.
You’ll need to meet income and purchase price limits to qualify for help through most down payment assistance programs, but the limits are often higher than many people realize. In Chicago, a married couple with one child could earn as much as $91,347 per year and still qualify for a down payment grant.
6. Ask family for help
Would-be homeowners who can’t come up with the cash for a down payment on their own often turn to family and friends for help. Nearly a quarter of people younger than 35 relied on gifts from family and friends to cover a down payment, according to the National Association of Realtors.
Gifts can get you to homeownership faster, provided you have a generous relative. But there are rules regarding donated down payments. Usually, the gifter must be a close relative, like a parent, and you’ll need proof the money is actually a gift, not a loan.