Do First Time Home Buyers Need Down Payment?

Do First Time Home Buyers Need Down Payment?

There are first-time home buyer programs out there that will actually Grant you down payment money that may or may not be free money. You need to find a buyer agent to help you out with that. If you start out looking for a lender you may or may not be lucky in finding a lender that participates in those programs.

A buyer agent can help you find a lender that participates. Also, depending on your location you may be able to take advantage of USDA loans. These are zero down payment programs that are available in rural areas.

I would call several agents and ask them all the questions you have about real estate in the market in your area, including what you’ve asked here. You’re looking for one who is knowledgeable about USDA programs, first time home buyer programs, and is a local market expert.

Down Payment

A down payment is the part of the sales price that you will finance form your own pocket the rest of the purchase price will be financed using a mortgage.

You can use this tool to see how much you can afford based upon your down payment and annual income is Zillow’s affordability calculator. It will take into account your monthly debts, the interest rate on your debt, your loan term, and many other settings that you can personalize to give you a more accurate result on a home price.

20% down payment

This may sound hefty but I would encourage you to come up with a 20% down payment if you are able to because it has one major advantage. By paying a larger down payment you will avoid paying PMI ( private mortgage insurance). In turn this can also help you qualify for a lower interest rate.

This will give you more equity faster, and it will result in a smaller monthly mortgage payment. If you are looking to buy in a sellers market, a larger down payment might also help you be a competitive buyer and stand out to the seller if there are multiple offers on the home.

Low down payment mortgage options

If you are looking to buy a home with low to no down payment your first step will be to research your mortgage options. I have compiled 5 best options you may have. These are the first-time home buyer programs that may be available for you as a home buyer.

  • 1. FHA loan
  • 2. USDA loan
  • 3. VA loan
  • 4. Fannie Mae or Freddie Mac
  • 5. State and local first-time home buyer programs and grants

1. FHA loan

This is the best option for you if you have low credit and your down payment is small

FHA loans are issued by the Federal Housing Administration, These loans most if not always come with smaller down payments and low credit score requirements. For example if you have a credit score of 580 you could buy a house with a low down payment of only 3.5%. A credit score of 500 may require you to pay a 10% down payment

The only disadvantage like I mentioned above is that you will have to pay PMI. You will notice that this will make you pay more in borrowing costs since the PMI premium fees have to be paid up front. You should take note that this insurance is not there to protect you but to protect the lender in case you default in the loan payment.

2. USDA loan

This typically best for you if you have low to moderate income and you are interested in purchasing a home in a USDA-eligible rural area

This type of loan is guaranteed by the U.S. Department of Agriculture, or USDA. With this type of loan you can get up to 100% financing. It does not mean that you have to buy a farm with livestock but all you have to do is buy in an area which is USDA-eligible.

This kind of loan has limits and it is based on where you live. It will be hard to get it if your credit score is less than 640 since the program is designed for people with a credit rating of 640 and above. I am not saying you won’t be able to get it if you have less than that it just means you will have to put in more work to get it.

3. VA loan

If you are an active duty military member, veteran or spouse of one you may qualify for this type of program

This Loan program is great because it comes with lower interest rates compared to most of the loan programs and the nice part is they do not come with a down payment. A funding fee will need to be paid but it can be rolled into your loan costs. The interesting thing is that some service members can be exempt from paying this funding fee.

A VA loan does not have a minimum credit score and you also do not need a private mortgage insurance (PMI) . The VA can also negotiate on your behalf if you find yourself struggling to keep up with mortgage payments.

4. Fannie Mae or Freddie Mac

If you have a good credit but your down payment is low this will be the best option for you

Fannie Mae and Freddie Mac which are government sponsored enterprises or GSEs set up guidelines for loans that they are willing to buy from lenders on the secondary mortgage market.

These programs require a 3 % down payment, a minimum of 620 credit score is also needed as well as a good financial credit history will also be needed for you to qualify

You will also need to have a private mortgage insurance, remember all programs that require a down payment less than 20% will need this. The good part is once your loan to value ratio gets below 80% you can get it canceled.

5. State and local first-time home buyer programs and grants

you are a first time home buyer who needs closing costs and down payment assistance this will be a great option for you.

In an effort to attract new residents many cities offer first time home buyer grants and programs. These grants may not or may be paid back with differed payments with low interest rates. Some cities may have income limits for you to qualify. I would advise you to check with your local HUD-approved housing counseling agency to learn more about first-time home buyer loans in your area.

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