How to Put Less Money Down on a House
The Ethos Guide to Down Payment Assistance and Affordability Options
Buying a home is one of the biggest and most exciting decisions you will ever make. If you are like most people, your house will turn out to be one of the greatest assets you own and provide you with a home for years to come. In most cases, you will need to take out a loan to buy a home – and that’s where your options could get confusing.
When it comes to home loans, there is a wide variety to choose from. One of the main factors at play when choosing which loan is best for your specific situation is your down payment amount.
Understanding Down Payments
Before we jump into strategies for putting less money down, it’s important to note that down payments actually work in your favor. So, if you have the opportunity to put at least 20% down, you definitely should. Here is why:
- Better interest rate: Oftentimes, lenders are willing to offer a better interest rate to those putting more money down because they are seen as less of a risk.
- Less interest paid over time: The more money you put down, even if it’s an additional 1%, the less you will have to pay in interest over the life of your loan, which can amount to thousands of dollars.
- No PMI: Making a down payment of at least 20% means that you don’t have to buy costly private mortgage insurance (PMI).
- More equity in your home: You will have more equity in your home from the beginning, which gives you more options – like taking out a CashOut Refi loan for remodeling.
- Lower monthly payments.
However, saving such a considerable sum can be difficult and potentially risky. You might end up emptying your cash reserves to make such a large down payment (putting you at risk in the event of an emergency). It could also be time-consuming and could substantially delay your home purchase. In some cases, if you find a way to reduce or eliminate the down payment, you might be able to buy a home much sooner or time it with more favorable market conditions.
How to Make Buying a Home More Affordable
U.S. News and World Report calls down payments “one of the biggest obstacles to homeownership.” For a normal loan, you will need to bring 20% of the purchase price to the table as a down payment – and that can mean saving tens or even hundreds of thousands of dollars before you have the chance to own your own place.
The good news is that there are ways to make buying a home more affordable.
The National Association of Realtors says that 39% of non-homeowners believe that they need to have a down payment of at least 20% while an additional 22% believe that you need 4-10% to get a home loan – but this isn’t necessarily true. Roughly 95% of first-time home buyers finance 95% of the real estate cost, that means put down, on average, only 5%. There are programs that help make that happen.
There are government-sponsored programs that let you buy a home with zero-down, but the requirements are pretty strict. If you have served in the military, there is a Veterans Administration (VA) loan program that allows veterans to buy a home with 100% financing. For specific areas of the country, some borrowers may be eligible for a USDA loan from the US Department of Agriculture. Physicians and Dentists could qualify for a Doctor Loan Program. Other specific programs may be available and are worth looking into.
Low Down Payment Options
For many people, one of the best options for a small down payment home loan is an FHA loan. These home loans are guaranteed by the Federal Housing Administration and require a 3.5% down payment for people with credit scores over 580. First-time buyers can also buy a home through one of Fannie Mae’s loan programs, such as HomeReady or Conventional 97. You will need to have a credit score of 680 or higher and will only need a 3% down payment.
You do not need to go through a government-backed program to get a good deal. Some direct lenders offer options with low down payments. For instance, Ethos Lending offers a conventional loan with just 3% down.
Family and Friends
If you need to come up with a down payment but you are having a hard time saving money while you pay rent, consider talking to your family and friends. Even if you don’t have someone who can loan you the money, you might have people in your life who would be willing to give you money instead of birthday or holiday gifts that you can use towards a down payment on a home.
A Word on Investments
When you are getting ready to buy a home, it can be tempting to take money from your retirement accounts or other investments. Make sure to consider that decision carefully. While you can withdraw the money outright, you can also expect to pay a penalty unless you are withdrawing the money from a Roth IRA or a traditional IRA for your first home. Adding a side hustle, picking up a second job, or simply saving longer could be smarter choices. Talk with your financial advisor to be sure.
In order to buy a home, you will likely need some amount of down payment. Lenders like Ethos Lending offer low down payment options to help make homeownership more feasible, but there may also be government-sponsored loan programs that may be worth looking into. Make sure to consider all of your options to make the best decision.
Ethos Lending is a new type of mortgage lender. We use technology to keep our operational costs as low as possible. From closing costs to interest rates, we have made it our mission to make the process of buying a home more affordable. Get in touch with one of our mortgage specialists to learn more.