What strikes dread into the hearts of aspiring homebuyers? What do they fear will prevent them from purchasing the property of their dreams? According to the COUNTRY Financial Security Index, 40 percent of Americans say that affording a down payment is the biggest financial obstacle to homeownership. For millennials, that number is even higher, at 46 percent. Clearly, knowing how to afford a down payment is crucial to achieving your goals of owning a home. How can you pull it off?
How to Afford a Down Payment on a Home
As The Street explains, a down payment is the amount of money a borrower pays the seller when making a home purchase; the rest of the purchase price generally comes from a mortgage loan. Many buyers believe that they need a down payment of 20 percent to buy a home, and while that’s not quite true, making a solid down payment does offer significant benefits. It demonstrates to both the seller and your lender that you’re committed to the purchase. This can increase your odds of having the winning bid when you’re competing for a home in a crowded market and improve your chances of being approved for a home loan. A larger down payment also allows you to borrow less, which can help you secure a lower interest rate and reduce the overall cost of your home purchase.
Understanding why it’s smart to have a down payment is easy. Figuring out how to afford a down payment on a home is where many prospective homebuyers stumble. Fortunately, there are several strategies you can use to assemble the funds you need for a down payment.
Strategy 1: Increase Your Income
If you want to save up for a down payment, Investopedia suggests finding a way to increase your income and putting the extra funds aside. Some find taking on a part-time job and tucking that paycheck away is an ideal way to set money aside for a down payment. Others opt to bring in a little extra cash by selling possessions that they no longer want or need.
Strategy 2: Boost Your Savings
Even if you are unable to bring in more cash, you may still be able to boost your savings to put more aside for a future down payment. Moneycrashers suggests setting aside your tax refund or any bonuses, using your credit card’s cash back program as a piggy bank, or automating your savings deposits to ensure that your savings doesn’t get forgotten in the financial shuffle.
Strategy 3: Accept a Gift
Do you have friends or family members who would like to help you achieve your housing goals? Accepting a financial gift can be an effective way to plump up your down payment. As long as it’s properly documented, your lender won’t frown on it. In fact, NerdWallet notes that nearly 30 percent of homebuyers ages 28 and younger used a gift as all or part of their down payment. Among buyers between the ages of 29 and 38, just over 20 percent used a gift to fund their down payment.
Strategy 4: Find a Down Payment Assistance Program
What about down payment assistance? As The Balance reports, you’ll find plenty of possibilities if you do a little digging. Federal, state, local, and community organizations all run various programs, so it’s wise to look around your area and see what you might qualify for. Some down payment assistance comes in the form of grants, which do no not need to be repaid. Others come in the form of special loans with extremely favorable terms.
Strategy 5: Choose the Right Loan
If you’re having trouble coming up with a sizeable down payment, your best bet may be to find a loan that doesn’t require one. As The Mortgage Reports notes, both VA loans and USDA loans offer options for 100-percent financing, which means no down payment is required. In addition, FHA loans and even some conventional loans can be secured with a down payment as low as 3.5 percent.
Which home loan will help you achieve your housing dreams? PrimeLending of Denver is ready to help you find it. We offer a wide array of loan products and will listen carefully to your needs and desires so that we can match you with the right choice. Contact us today to get started.