If you have a plan to buy a home in the next three to five years, then you need to start saving for the down payment now. why you ask? Because it could take awhile. What is taking so long? Americans are only saving around 5.6% a year according to The National Association of Realtors as they quote research by RealtyTrac. “It’ll take 12.5 years, on average, for first-time buyers to amass a 20 percent down payment.” But do you really need the 20% and are there other options for first-time buyers?
Do You Need 20 Percent Down?
Traditionally, The FHA (Federal Housing Administration) recently lowered down-payment requirements for mortgages it insures to as low as 3.5 percent to make it easier for buyers to get into the market. The FHA program has been around since 1930s when a major wave of bankruptcy and foreclosures killed lenders in the housing market. Now the program is VERY popular amoung first-time buyers.
Buying a $100,000 home with 3.5 percent down would mean you’d need to bring just $3,500 to the deal. That’s probably less – maybe a lot less – than you spent on your car.
But like all good things, there is downside. So what happens if you don’t make that 20 percent down payment? Good question. Here’s the reason: If you contribute less than 20 percent down to a home purchase, you’ll be required to buy mortgage insurance. It protects the lender, not the buyer, from the chance you’ll fail to make your payments.
Here are some awesome ways to avoid all that though:
1. Set up a dedicated account
Get going by setting up an account that pays the most interest possible while letting you access your savings. If you’ll be tempted to divert the money to other needs, set up an account solely for the down payment. Shop around though and find the best interest rate!
2. Dedicate windfalls and pay bumps
Pledge to put every single tax refund, gift of cash, purchase refund and work bonus into your down-payment account. While you will seem very eger to spend or buy something cool, think of the big picture, and the dream home you’ll be able to afford in the near future.
3. Sell Your Stuff
Sell your possessions for cash to fatten your account. This is pretty explainatory. Hold your own garage sale, be involved in a local community garage sale in the spring or summer. Use popular sites like ebay, amazon, or craigslist to help you find potential buyers for your stuff.
4. Get help from family (Read carefully)
Rules differ by lenders on whether and how much help you can get from gifts for your down payment. Zillow reviews those rules.
One example: The FHA lets borrowers apply gifts from immediate family members toward a down payment. You’ll be required to produce a “gift letter” from the giver, verifying that the money is not actually a loan. You’ll probably also need to show copies of checks or wire transfers so your lender can verify the origin of the gift.
The Washington Post discusses the complexities of family gifts.
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Buying your first home is major financial and investment step of your life, and we want to see first-time buyers succeed! If you have questions about the FHA program or down payments in general feel free to comment below, subscribe to our future blogs or check out our 30 Year Mortgage blog! You can also contact us and talk to any of our experienced agents!