Saving for a home down payment is a massive undertaking. Not only do you have to save up 10-20% of the home’s value, you also have to save for closing costs, and make sure you have enough left over in savings to prove to the bank you’re not going to end up destitute after you sign the paperwork. While I’m not a big fan of subprime lending (who is anymore?) or taking out a loan you can’t afford (you’ll never build equity!) I am all about programs that can help people reach their goals faster and responsibly. Especially with the state of renting threatening to erode another rung in the ladder to the American Dream.
Here are four programs that can help with your home down payment or closing costs. Remember to use them not to buy something you can’t afford, but to help you mitigate costs that are prohibiting you from building wealth.
VA loans are loans for those who are currently serving or have served in the military. These loans allow you to get into a home with 0% down and no PMI (private mortgage insurance.) I’m all about programs that help out veterans and soldiers, but I do want to throw a word of caution out there with this one. When you are buying with 0% down, your mortgage is going to be larger. You’re also starting with zero equity. It’s imperative to be 100% sure you can afford your monthly payments. If you can, a VA loan can be a good vehicle to get you into a house. The house must meet certain criteria, so know that you likely won’t be purchasing a foreclosure or something that needs a lot of fixing up before it is usable.
First-Time Home Buyer Programs
These have slowed and decreased in benefit level since the Recession, but they do still exist. Most states provide a first-time home buyer program through the state housing financing association, and some counties and municipalities provide additional programs. These hyper-local programs are typically for homes in areas they’re trying to revitalize, so you must buy withing certain neighborhoods to get the assistance. These programs offer a range of benefits which will vary from state to state, county to county, and city to city. They can include grant money for down payment assistance, closing cost assistance, a second mortgage with 0% interest that closes the gap between how much you have saved and how much you need for either of these two costs, or simply lower-interest mortgages.
These programs aren’t unique to the US, and it’s interesting to see how they function around the globe. For instance, in Australia, the folks at Homestart are the leading first home builders in Perth. There, they have grants up to $10,000 for first-time home owners, and you can actually use the money to build a new home with no deposit out of your own pocket.
FHA loans are run through the Federal Housing Administration. With these loans, you only need 3.5% as a down payment, and you’re actually allowed to receive 100% of the funds as a gift from a relative. The downsides to this are much akin to those of the VA Loan: you’re starting with less equity, and the size of your loan will be larger. On top of that, FHA loans require that you pay PMI, and it’s more expensive on these loans than on traditional loans.
Your best bet is to save up enough to pay for everything yourself, but if you’re in a situation where rent is keeping you from being able to save up for the down payment, but you could afford monthly mortgage payments once the rent was gone, it’s worth at least looking into these programs and running your own numbers to see how it would pan out for you in the long-term.
*This post is in collaboration with Homestart. All content is created by and the opinion of Femme Frugality.*