Newlyweds Max and Samantha are hoping to buy their first home this year, but they find the idea of saving 20% for a down payment daunting. They want to invest their money in a home rather than having it slide away with rent payments. They have great credit and good jobs, but they don’t have 20% of a home purchase in their savings. Max thinks they should dip into their 401k so they can put down 20% now, but Samantha thinks they should just wait until they’ve saved the 20%. Who’s right? Maybe neither!! Believe it or not, there are many down payment programs that would allow Max and Samantha to purchase a home with a down payment they can afford now without sacrificing their 401k savings.
Samantha and Max are not alone in their concerns and misconceptions about mortgage down payment requirements.
- According to a recent Zillow report, one out of five homebuyers consider saving for a down payment a challenge.
- The Zillow report also states that a down payment of 20% is typically about two-thirds of the average annual income.
- Fannie Mae reports that 76% of Americans are either unaware (40%) or misinformed (36%) about current minimum down payment requirements.
Why shouldn’t they borrow from their 401k?
While cashing in a 401k helps the homebuyer now, they may regret using it when it’s time to retire and they do not have enough saved for retirement. Also, they should consider the impact of time on the value of money. The cost of the purchase is increased by rises in mortgage fees and interest rates.
Twenty percent down payments are no longer common
Conventional loans with lower down payments and no mortgage insurance fees are available for homebuyers with good credit, and FHA mortgage down payment assistance is also available as well as many other down payment assistance programs such as IHDA through the state of Illinois.
- A Digital Risk survey of millennials who recently purchased a home shows that 64.2% put down less than 20%, and 43.8% put down less than 10%.
- According to the National Association of REALTORS®’ Profile of Home Buyers and Sellers, the median down payment for first-time buyers over the past three years was between 6% percent and 14% for repeat buyers.
FHA mortgage down payment assistance is also available for those with less than stellar credit. While this will allow the homebuyer to purchase their home sooner and with a lower down payment, the homebuyer should plan to stay in the house for about five years to maximize the investment value of the home. This will help recoup the additional mortgage premium and insurance fees incurred with FHA mortgage down payment assistance.
Down payment assistance programs are not just for first-time home buyers
Most potential homebuyers assume that they will not qualify for down payment assistance if they have previously owned a home. However, the majority of programs define first-time homebuyers as a homebuyer who has not owned a home in three years. In addition, there are some programs that do not have any qualifications dependent on previous or current home ownership status.
Max and Samantha are closer to their first home than they think. By taking the time to interview a few lenders and find one who can help them determine the best mortgage down payment assistance program, they can be on their way to a new home in months rather than years.
To learn more about whether or not you may qualify for a down payment assistance program, contact your loan officer or local bank. An LW Reedy real estate agent can talk with you about working with one of our approved lenders.