If there’s one thing that gives people pause before buying a home, aside from relatively high interest rates, it’s coming up with the down payment.
The good news is that a 20% down payment is no longer the norm, and lots of people buy houses with a small down payment or none at all (usually through first-time homebuyer or military veteran homebuyer programs). Different mortgage programs have different requirements, but the average homebuyer is putting down much less than 20% on their home.
However, putting at least some money down on a house can result in a lower monthly payment, instant equity, a more attractive purchase offer to sellers, and, if you put down enough, the ability to avoid Private Mortgage Insurance (PMI) altogether. Depending on your lender, you might even qualify for a lower interest rate on your mortgage!
But, where should your down payment money come from? Here’s a look at potential sources of down payment money and the benefits and drawbacks of using each.
1. Savings. Particularly for first-time homebuyers, the best source of money for a down payment is your own savings that you’ve built up over time, either in a savings account or in an investment account. Using money that you saved up yourself shows your mortgage lender that you’re responsible with money management and you have the discipline to focus on long-term goals. But, be careful not to use all of your savings for the down payment, because you might need some of it for closing costs, initial home repairs, furniture, your move and other expenses. You also want to make sure you don’t touch your emergency fund in case you need it shortly after you move.
2. Down Payment Assistance Programs. For first-time homebuyers or homebuyers with moderate income, ask your Realtor and mortgage lender about assistance programs from state and local housing agencies that can provide down payment funds. Sometimes these come in the form of a forgivable or low-interest second mortgage, and eligibility may rely on a variety of factors. You should also find out if your employer has any assistance programs. You don’t necessarily want to take on additional debt for a down payment, so make sure you understand the terms. Sometimes a smaller down payment is better than a bigger down payment that comes with interest and fees. (FYI: CommonWealth One also offers a First Time Homebuyers program, which qualifying members can use to receive up to $20,000 toward down payment and closing costs. Ask our mortgage loan officer for details if you’d like to see whether you qualify.)
3. Gifts. You may receive money from parents or other relatives, including money from an inheritance. If you can, check with your lender before you receive this money, because there may be specific documentation needed, or there may be certain requirements about how that money is transferred to you. They will also want assurance that the money truly is a gift and not an informal family loan.
4. Sale Proceeds. You can get money from selling stocks or investments, or from selling the house you’re moving out of (if this is not your first home). Just be careful about leaving yourself cash-poor, because you will need some of that money for the move, repairs and other expenses that may come up.
5. Retirement Savings. To be blunt, you don’t want to do this. While there are some types of retirement accounts that let first-time homebuyers use their retirement savings for a down payment, there are often taxes and penalties. Plus, you’re losing out on future investment growth by taking money out of your retirement account.
6. Loans. Depending on your mortgage program and lender, borrowed funds may be allowed for a down payment, but proceed with caution. Taking on a personal loan or other debt adds another monthly payment, increases your overall debt and could affect how much mortgage you qualify for. Before borrowing, talk with your lender and make sure the added payment fits comfortably within your budget. A smaller down payment may be a better choice than taking on more debt just to make a larger one.
Have questions about the homebuying process? We’re here to help!
Buying a home is one of the biggest financial decisions you’ll make, and it’s normal to have questions along the way. We’d be happy to set up a meeting with one of our certified financial counselors or mortgage loan officers so you feel confident going into this process.
Whatever route you take to get there, savings, assistance programs, gifts, or a combination, the right choice is the one that sets you up for long-term stability, not just a quicker closing. Take your time, ask questions, and lean on your team of professionals to help you get there.
Happy house hunting, from all of us at CommonWealth One!
