How to Finance the Down Payment on Mortgage for First-time Homebuyers

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Giving away a huge chunk of your savings as mortgage down payment on your first home is quite easier said than done. First-time homebuyers usually consider saving for the down payment along with other financial strategies. The most ideal strategy will help you out to clear your down payment problem without putting your finances into harm in the long run.

The following are few options that a first-time homebuyer can consider while making their down payment on their first home mortgage loan:

  1. Mortgages with a Lower Down Payment

Usually, financial lenders prefer you to make a down payment of at least 20% of the price of the property. However, there are several low down payment options available for first-time buyers

  • Veterans Affairs home loans* by the Department of Veterans Affairs offers 0% down payment options for individuals who qualify for those loans.  
  • The same is the case with the USDA loans** offered by the Department of Agriculture.
  • Officials with the Federal Housing Administration (FHA)*** requires individuals to make down payment of at least 3.5%.
  • Conventional loans offer down payment options of as low as 3% to individuals who have a good credit score. However, such loans are not backed by the government.

Drawbacks

  • A smaller down payment amount can usually trigger additional expenses. Mortgage insurance, which usually protects financial lenders in case you default is required on all types of conventional loans which allow for down payments of less than 20%+.
  • The VA loan is usually associated with a funding fee which can be rolled into your loan payment every month.
  • Besides, you must always be aware of the fact that a lower down payment is associated with a higher interest rate.
  • Borrowing against Equity in Another Property

An ideal way to make a down payment is by utilizing the equity from an existing property in order to buy another home. In case you have come across a good offer for your dream home and do not wish to miss on the same, then you can try leveraging the equity of your present home as it is not expensive. Home equity products usually work out in your favor as they have a lower consumption rate in the market.

Advantages

  • It can be quite inexpensive compared to other loans
  • It’s a very quick way to arrange for cash for making a down payment

Disadvantages

  • This method takes time if you want to liquidate it in case of any emergencies
  • Borrowing from Family and Friends

One of the best ways to arrange for funds for making a down payment is to borrow from your relatives and close friends. In case they have the ability to help you financially, then it is a much easier option as you work with people whom you trust rather than unknown financial lenders. However, you must keep in mind that financial lenders such as banks can consider this as a debt burden and will keep it into consideration when deciding if or not should they lend you money.

Advantages

  • You can choose to borrow from people whom you trust
  • You do not face the stress of repaying the amount quickly

Disadvantages

  • Financial lenders will consider this transaction as debt
  • You still have to pay off the borrowed amount to the concerned individual one day. It may lead to strained family relationships or even harm your friendship in case you do not repay the money on time
  • Borrowing from your Retirement Funds

Another way to arrange for the mortgage down payment is by borrowing from your retirement funds. Whenever this thought crosses your mind, you definitely think about the penalties associated with withdrawing the amount before the retirement age. However, in case you are buying a house for the first time, you will be surprised to know that there are certain qualifications that allow you to withdraw around $10,000 from Roth IRA++. However, this is just a one-time chance which can turn out to be quite helpful for you. You will have to pay taxes but there won’t be any penalties associated with it.

A 401(k) plan can also present you with an opportunity to borrow as much as $50,000 of cash. It also depends on how much amount you have available. Also, you will have to repay the same within a certain period. If you are considering this option, then it is much better to have a word with your retirement plan administrator as well as your employer to find out what might happen if you choose to leave your job during the repayment tenure.

 Advantages

  • you can borrow a good amount of money to fund your mortgage down payment
  • No penalties are associated with Roth IRA

Disadvantages

  • If you’re planning to borrow from your 401(k), then you will have to repay the entire borrowed amount within a specific time frame.

References:

* https://www.benefits.va.gov/homeloans/

** https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do

*** https://www.hud.gov/federal_housing_administration

+ https://www.cnbc.com/2017/06/08/how-to-get-around-that-20-percent-mortgage-down-payment.html

++ https://en.wikipedia.org/wiki/Roth_IRA 

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