You are going to need to accumulate some cash before receiving traditional bank financing. Here are seven things you should know about the down payment process.
Fact: Unless you are able to obtain a VA loan, you are probably going to need a down payment if you are planning on purchasing a home. Down payment minimum requirements can range from a VA loan’s 0% to 10% or more.
The FHA has a first-time homeowners program that will allow you to put only three and one-half percent down. Individual states like Minnesota have programs where you can borrow the down payment.
Understand that you are going to need to accumulate some cash before you are allowed to receive traditional bank financing. A great place to start would be reading financial blogs and educating yourself about savings and best practices.
In the meantime, here are seven more things you should know about the down payment process and how you can prepare for it.
Verify your funding source
Lenders will want to know where your down payment originated. This is to make sure that the seller is not artificially inflating the property’s purchase price and kicking down payment money back to you. Rather than find unexpected surprises along the way, listen to the advice of others, especially your community banker, to make sure you are following the smartest tips for saving for your new home.
Down payments can be a gift — literally
Your parents or a relative or friend can give you the down payment. Again, you will have to be sure that the money is traceable to the person you say provided it to you. You can receive a gift of up to $16,000 tax-free in 2022.
Start saving early
The best way to accumulate a down payment is to start saving early. When you’re living in a smaller town after college, it is easier to save more. But how much should you save? Of course, consider your timeline to purchase a home. If you save $100 per month at three percent interest, in 12 years you will have over $17,000!
Try using a mortgage calculator to determine either how much you can save as you go, or how much you want to accrue. Even if you are early in the process (yes, even way early), speak to a home loan officer at a community financial institution. They can offer suggestions specific to the area where you intend to purchase.
The FHA is your friend, but…
A down payment of 3½% is great, but, with an FHA (Federal Housing Administration) loan, you will have to pay private mortgage insurance, or PMI, until you have a certain amount of equity in your home — usually 25%. adding over $100 to your monthly payment. It's important to consider all the additional fees and costs of the home-buying process.
Credit card cash advances
Your mortgage lender is going to do a forensic accounting investigation into your financial status. Sure, you could max out a couple of credit cards a year before your proposed home purchase and take cash advances that you place in a savings account.
If your down payment has been in a savings account for a year, the lender may assume you have legitimately saved the cash, but the problem is that your credit report will reflect the high credit card balances from a year ago, and you may have to pay a higher interest rate, or you may even be denied a loan.
Having insight into what a loan officer will need to see, preferably before you make any big financial money moves, will guide you responsibly through the process.
Veteran's Administration loans
As mentioned previously, a VA loan is a great way to finance your home. If you or your spouse are veterans, you must take advantage of this opportunity. Your traditional lender can help you navigate the VA loan requirements.
Consider finding a local realtor or loan officer who specializes in VA loans, or has served in the military and has gone through the VA process, too, to make sure your specific needs and questions are addressed.
Don’t be afraid to ask
If you are having problems coming up with down payment cash — and this cannot be stressed enough — ask a loan officer at a credit union or a community banker who specializes in home loans. For many people, talking about your personal finances may make you feel a bit uncomfortable, but speaking with an expert will help you far more than going it alone.
There are options available to help first-time home buyers that might be ideal for you. Plus, having someone take a closer look at your overall financial plan may help you find practical solutions. They will be aware of any government programs that can help you, too.
In the end, it's important to plan ahead, seek advice, and make smart financial decisions to help you both build your credit now and eventually your future home.