With interest rates hovering around historic lows, the main barrier to entry into the homeownership market is the cost of making a down payment. While saving for a down payment is still important, there are many sources of assistance that otherwise qualified homebuyers often do not consider. Knowing about these sources may help some buyers to enter the market earlier than they expected or purchase a home that they wouldn’t otherwise be able to afford.
Government Programs & Grants
Many prospective homeowners know that government programs exist, but either do not know about specific programs or grants that apply to them or assume that they are too affluent to qualify. In reality, applicants making as much as 140 percent of the median area income may qualify for government assistance. Additionally, there are specific programs that buyers may qualify for regardless of income.
Buyers who are new to the market or who have not owned a home in the previous three years often qualify for down payment assistance as a result of programs that are designed to encourage homeownership. Military veterans, service members on active duty, reserve personnel and their widows or widowers qualify for VA loans, which come with favorable terms including the possibility of a low down payment. Police, first responders and teachers may also qualify for government assistance through their work.
Another option may be to take out an interest-free loan to cover the down payment. These loans may come in the form of a secondary mortgage that only requires repayment after the original is paid off or the house is sold or some other, similar structure. Because homeowners who take out these loans will have no initial equity in their homes, this option is generally best for buyers who plan to own the property for many years.
There are a number of potential sources of interest-free loans, but a good place to start is your local government. Many cities offer interest-free loans to help area residents defray the cost of purchasing their first home.
If you have good credit, but you don’t have access to government programs, grants or interest-free loans, you may qualify for a down payment loan through a traditional lender. These loans are for well-qualified borrowers who do not have the money to make a down payment but who still represent attractive customers. Generally, these loans will have interest rates, meaning that they are not as attractive as other options. However, if these options aren’t available, traditional lenders may be happy to fill the gap.
Generous family members or foundations may also help buyers to clear the down payment hurdle. Many FHA programs allow up to 2 percent of a down payment to come from external funds. Properties that have been previously foreclosed upon by Fannie Mae may allow the entire down payment to be funded by a gift, grant or loan.
Making that first down payment is a major step in most Americans’ lives. It may be difficult, but most homeowners would agree that it is well worth it.
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