• Thu. May 26th, 2022

How to fund the down payment on mortgage for first time home buyers

ByCindy J. Daddario

Mar 9, 2021


Give away a large part of your savings as a mortgage Making a down payment on your first home is easier said than done. First time home buyers usually consider saving for the down payment along with other financial strategies. The most ideal strategy will help you solve your down payment problem without putting your finances at risk in the long run.

Below are a few options a first-time buyer can consider when making their first deposit Mortgage loan:

  1. Lower down payment mortgages

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

  • Veterans affairs Home loan* by the Department of Veterans Affairs is offering 0% down payment options to individuals who qualify for these loans.
  • The same applies to the USDA loans ** from the Department of Agriculture.
  • Officials with the Federal Housing Administration (FHA) *** requires individuals to pay a deposit of at least 3.5%.
  • Traditional loans offer down payment options of as low as 3% to people with good credit ratings. However, such loans are not supported by the government.

disadvantage

  • A lower deposit amount can usually trigger additional costs. Mortgage insurance, which usually protects financial lenders in the event of default, is required for all types of conventional loans Down payments of less than 20%+.
  • The VA loan usually comes with a financing fee that can be incorporated into your loan payment each month.
  • Also, you always need to be aware that a lower down payment comes with a higher interest rate.
  • Borrowing against equity in another property

An ideal way to make a down payment is to use the equity of an existing property to buy another home. If you’ve found a good deal on your dream home and don’t want to miss out on it, you can try using the equity of your current home as it isn’t expensive. Home equity products tend to work in your favor as they have a lower rate of consumption in the market.

advantages

  • It can be quite cheap compared to other loans
  • It’s a very quick way to get cash for a deposit

disadvantage

  • This method takes time if you want to liquidate it in an emergency
  • Borrowing from family and friends

One of the best ways to raise funds for a down payment is to borrow from your relatives and close friends. In case they can help you financially, this is a much easier option because you are working with people you trust, not unknown lenders. However, you need to keep in mind that financial lenders like banks can view this as a debt burden and take this into account when deciding whether or not to lend you money.

advantages

  • You can borrow from people you trust
  • You don’t have to worry about repaying the amount quickly

disadvantage

  • Financial lenders consider this transaction a debt
  • You still have to repay the borrowed amount to the person concerned one day. It can lead to strained family relationships or even harm your friendship if you don’t pay the money back on time
  • Borrowing from your retirement plan

Another way to get the mortgage down payment is to take out a loan from your retirement plan. Whenever this thought crosses your mind, be sure to think about the penalties associated with paying out the amount before retirement age. However, if this is your first time buying a home, you might be surprised to find that there are certain qualifications that can help you withdraw around $ 10,000 Roth IRA++. However, this is only a once-in-a-lifetime chance that can prove very helpful to you. You have to pay taxes, but there are no penalties associated with it.

A 401 (k) plan can also give you the option to borrow up to $ 50,000 in cash. It also depends on how much money you have available. You also have to repay this within a certain period of time. If you are considering this option, it is far better to speak to your pension plan administrator as well as your employer to find out what could happen if you leave your job during the repayment period.

advantages

  • You can borrow a good amount of money to help fund your mortgage down payment
  • There are no penalties associated with the Roth IRA

disadvantage

  • If you plan to borrow from your 401 (k), you must repay the entire borrowed amount within a certain 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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