First-Time Home Buyer Down Payment Guide

Owning your own home is a big part of the “American Dream.” If you’re a first-time home buyer in Houston, the process of securing a mortgage can feel overwhelming. For a first-time home buyer, down payment assistance may be necessary, as saving up enough money for a substantial down payment is often easier said than done. Many of your most important questions will be answered in this guide, and speaking to a mortgage lender can help you understand how the down payment process works. 

What Is a Down Payment?

Whether you’re a first-time home buyer or you’re moving into your dream home, most mortgage lenders require some payment upfront — that money is known as a down payment. Many times, a 20-percent down payment is required. For example, if you are buying a home for $100,000, you would need to put down $20,000 as a down payment to secure the loan.

Do First-Time Home Buyers Need a Down Payment?

Most first-time home buyers will need a down payment to secure a mortgage for their primary residence. There is no first-time home buyer “minimum” down payment requirement, but most lenders and programs will require something down, although there are some zero-down options available, depending on your financial circumstances.

How Much Should a First-Time Home Buyer Put Down?

There is no one right answer to this question. Many factors come into play when first-time homeowner down payments are considered. For example, some programs may allow you to qualify for a loan with only a 3 percent down payment, but you likely would have to pay mortgage insurance and a higher interest rate. 

Putting 20 percent down allows you to bypass the mortgage insurance requirement. It also lowers your overall loan amount and leaves you with a smaller monthly payment. We will look at some programs offering lower down payment options later in the article.

What Are Some First-Time Home Buyer Down Payment Strategies?

For first-time home buyers, down payments are often made using a combination of personal savings and other financial strategies. Finding the right strategy will help you find sufficient funds for a down payment and leave your future financial situation strong. 

Here are four strategies that first-time home buyers can use to come up with a down payment:

Assistance Programs

There are thousands of first-time home buyer down payment assistance programs in the U.S. that can help buyers find grants, zero-interest loans or other assistance. Many of these assistance programs are managed by nonprofit organizations or government agencies. Be aware of the geographic focus of the program before applying, as many are targeted at specific states, cities or even neighborhoods.

Besides assistance with a down payment, programs also can offer better interest rates on your mortgage or even tax breaks.

Mortgage Options With Low Down Payments

While the traditional down payment expectation is 20 percent, there are many options available to allow first-time buyers to put down a smaller percentage.

Some of these options include:

• VA loans and USDA loans, both backed by government agencies, offer zero-down payment options for qualifying borrowers.
• FHA loans, with backing from the Federal Housing Administration, let home buyers make down payments as low as 3.5 percent.
• Conventional loans are available to first-time home buyers with down payments as low as 3 percent.

Remember that any mortgage with a low down payment probably also has a higher interest rate, and it will leave you with larger monthly payments.

Borrowing From Your Retirement Account

Some first-time home buyers tap into their retirement savings to make a down payment, but this option must be used carefully and with a full understanding of the consequences. Different types of retirement accounts have different rules and requirements for withdrawing money.

• Traditional 401(k) plans can allow for loans or early withdrawals. If you choose an early withdrawal, you will face a 10 percent tax penalty and income taxes. If you choose a loan, you need to repay the loan with interest or pay income taxes and a penalty.
• A traditional IRA account allows up to $10,000 to be withdrawn for first-time home buyer down payments. There is no penalty, but you will pay income taxes.
• With a Roth IRA, withdrawals are allowed for a first-time homeowner down payment without penalty or taxes as long as you’ve had the account for at least five years.

Using Gift Money From Family or Friends

Many first-time home buyers receive assistance from family or friends. According to a National Association of Realtors report, 29 percent of Millennial home buyers used money from a friend or relative to make their down payment.

Some loan programs allow you to use gift funds for the whole down payment, but others want to see that the buyers have some of their own money to put down before approving a mortgage.

Let Supreme Lending Help You Buy Your First Home

If you are a first-time home buyer, let Supreme Lending help. Our team of experts is always here to help you and your family with every step of the process, including finding the right first-time home buyer down payment assistance for you. Contact us today and discover how we can help.