Figuring out how to make a down payment for mortgage for first time home buyers can be one of the most overwhelming aspects of becoming a home owner, but armed with a little information, the process can be much easier.
Down Payments Explained
A down payment is the amount of money that a home buyer pays toward the purchase price of his or her home at closing. It is the percentage of the purchase price that is paid in cash rather than being financed.
The average first time home buyer is probably very concerned about how much money will be needed to make a down payment on a home. The amount of money needed for an adequate down payment can vary greatly depending on several different factors.
Factors Impacting Down Payment Requirements
The following factors may impact the down payment:
- Type of Loan: Federal Housing Administration (FHA) mortgages may require 3% or less; other types of mortgages may require a 10 - 20% down payment.
- Credit Rating of Buyer: Credit rating can impact both the type of loan a buyer qualifies for and the required down payment amount.
- Purchase Price of Home: Down payments are typically a percentage of the final purchase price. Therefore, the more expensive the home you are purchasing, the more cash you will need for your down payment.
- Availability of Down Payment Assistance Programs: First time home buyers may qualify for financial assistance.
What Are Down Payment Assistance Programs?
Down payment assistance programs are designed to help first time home buyers realize the American dream of homeownership. Some municipalities, counties, states, and other organizations sponsor first time home buyer assistance programs for qualified applicants.
Examples of Down Payment for Mortgage for First Time Home Buyer Programs
Here is a brief listing of some of the down payment assistance programs available throughout the country. For a more extensive listing visit the website for the U.S. Department of Housing and Urban Development.
- Austin, TX Down Payment Assistance program
- California Housing Finance Agency
- Connecticut Housing Finance Authority
- Texas First Time Home Buyer program
- Travis County (TX) Housing Finance Corporation
- Ohio Housing Finance Agency First Time Home Buyer program
Down payment assistance programs can vary greatly from one area to another. Although some programs offer substantial assistance, they do not generally provide full down payments. Each program usually specifies a dollar amount or purchase price percentage that home buyers must contribute. Most programs have specific income, residency, housing type, property condition, geographic, and other restrictions. Applicants are also usually required to complete homeowner training classes before being approved and after the purchase is finalized.
It is a good idea to speak with reputable Realtors and mortgage brokers in your community to learn about additional assistance programs or other special financing options for first-time home buyers.
Benefits of a Larger Down Payment
Some people feel that it is best to make the smallest possible down payment when purchasing a home, whether it is your first home or your third or fourth. The obvious benefit to making a low down payment is being able to purchase a home without having to use a significant portion of savings. Even people who have access to down payment money often choose to make lower down-payments so they can use their available funds for other purposes.
It is important to keep in mind, however, that there are also benefits associated with making a higher down payment on your first home. The more your down payment, the lower your monthly payment will be. If you have money that can be used for a larger down payment than the minimum amount required you can enjoy the reduced stress of having lower monthly bills.
There is also a hidden cost associated with low down payment mortgages. When you borrow 80% or more of the purchase price of your home, you may be required to take out Private Mortgage Insurance (PMI), which increases your monthly payment but does not help you build equity in your home. If your down payment is 20% or more, you can avoid this expense and make sure that all the money you pay each month goes toward paying off your home loan.
The following books provide excellent suggestions for those making decisions about down payments other factors that need to be considered when purchasing a home for the first time.
- 10 Steps to Home Ownership by Ilyce Glink
- Buy Your First Home! by Robert Irwin
- Eyes Wide Open: A Mortgage Guide For First Time Home Buyers by Starla Barnhill
- How to Buy Real Estate Without a Down Payment by Susan Smith Alvis
- How to Buy a House with Little or No Money Down by Martin Shenkman and Warren Boroson
- The National Association of Realtors Guide to Homebuying by Blanche Evans
Before You Buy Your First Home
It is definitely worth investigating down payment for mortgage for first time home buyers before you purchase your first home. You might find that becoming a homeowner is a surprisingly affordable option.