Many first time home buyers often hit a major roadblock when they encounter down payment requirements. The expectation within the mortgage industry is that 20% of the mortgage amount will be made as down payment. This is simply more than many first time home buyers can manage without help. As discouraging as this may be at first glance, there are multiple down payment assistance options available to help your homeownership dreams become reality!
Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) is one of the more popular options that is available to help you reach a 20% down payment amount. PMI is a tool used to help borrowers reach the necessary down payment while simultaneously protecting the lenders in case of default. The cost of the PMI is added to your mortgage and then paid monthly alongside the mortgage payment. While this does increase initial monthly payments, it does not continue through the life of the loan. Once payments have been made equivalent to 20% of the home's original value, PMI is often canceled or terminated and traditional mortgage payments resume.
A gift letter is a letter that promises a specific amount to be given to home buyers for down payment assistance. Funds can be gifted to you by family, friends and employers who will often qualify for tax benefits due to their monetary gift. Sometimes, these gifts can help you steer clear of needing PMI. The mortgage company will need the letter in writing to take into account the nature of the gift so it will not affect your expenses. Need to write a gift letter for your mortgage lender? Find a sample here.
You can check into options available locally, statewide and federally to help reduce or eliminate the standard 20% down payment requirement. Qualified buyers are only required to pay 3.5% down through an FHA mortgage. Other programs offered by the USDA, Veterans' Administration and Mass Housing require no down payment. Depending upon your location, there may also be community development grants or bonds available. Be aware that most assistance programs may have specific criteria, income requirements, or they may require you are a member of certain groups. Explore down payment assistance options that are available in your area.
Opening the door to your new home may take a bit of research, but it will be worth it! For more information on down payment assistance and other first time home buyer tips, download our eBook now!