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 yet another rung in the ladder to the American Dream.
Here are four programs that can help with your home down payment or closing costs. Don’t use these programs to buy something you won’t be able to afford. But definitely use them to help mitigate costs that are prohibiting you from building wealth.
VA Loans
Who qualifies for a VA loan?
VA loans are loans for those who are currently serving or have served in the military. Widows of those who have died in the line of duty or from a disability incurred while in the line of duty can also qualify in some instances.
What’s the benefit of a VA loan?
These loans allow you to get into a home with 0% down and no private mortgage insurance (PMI).
Is a VA loan a good idea?
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. If you can’t, you could end up being house poor very quickly.
Can I use a VA loan to flip a house?
No. The house must meet certain criteria; you likely won’t be purchasing a foreclosure or something that needs a lot of fixing up before it is usable.
You’re also not allowed to use a VA loan to purchase properties that are purely real estate investments — you have to occupy at least some portion of the home.
First-Time Home Buyer Programs
First-time home buyer programs have slowed and decreased in benefit level since the Recession, but they do still exist.
Where can I find a first-time home buyer assistance program?
Most states provide a first-time home buyer program through the state housing financing association.
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 within certain neighborhoods to get the assistance.
What are the benefits of a first-time home buyer program?
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.
- Grant money for closing cost assistance.
- Second mortgages with 0% to fund down payment.
- Second mortgages with 0% interest to fund closing costs.
- Lower-interest mortgages.
FHA Loans
What is an FHA loan?
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.
What’s the catch with FHA loans?
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 you pay PMI. To compound things even further, PMI is more expensive on FHA loans than it would be on a traditional mortgage.
Should I use these home buyer assistance programs or not?
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 getting that down payment down payment together, you may want to look into these programs and specialized mortgages.
As long as you could afford monthly mortgage payments once the rent was gone, it’s worth at least running your own numbers to see how it would pan out for you in the long-term.
We bought our house with a VA loan, which we thought was great at first, but we really struggled for a while. Now we owe more than it’s worth, and we have to rent it out just to cover our bills. People definitely need to have done their homework before they jump into home-ownership with a VA loan.
Yeah, that’s the danger of a VA loan, and it’s a huge one. While it’s great that it allows you to get your foot in the door, there’s a serious risk of ending up upside down. I’m sorry you guys had to go through that.
Even if you aren’t a first time home buyer- definitely look into those programs. Certain neighborhoods (including mine) are considered “revitalization areas” and the grants are based only on income rather than income and home ownership experience. We didn’t qualify, but we tried.
Awesome tip, Hannah! Thank you!
Great tips, Femme! We bought our last home using owner financing. It was pretty cool. If we hadn’t sold it, it would have been paid off in 7 years’ time. I highly recommend this option. We still made out well when we sold it after owning it for only 3 1/2 years.
Something I’ll have to look into! Thanks, Kay!
Good tips. Saving a downpayment can for sure seem unsurmountable. Hope you are well, femme.
Aw, Ms. S!!! I hope you are too!
Good tips! My husband used the first time homebuyer program when he bought our house and had a good experience. It definitely helps to have these sorts of programs in place, because purchasing a home is such a daunting experience.
That’s awesome! Glad to hear a good news story on one of these. If used and administrated responsibly, they can be a good thing.
These are great tips! You can, however, get a conventional loan and only put 5% down in some situations. Granted, you’ll have to have private mortgage insurance until you get to 20%, but it’s a good way to get into the house you want without having to save up such a huge chunk of money first. It actually might be a little better than a FHA loan because even though you have to come up with 1.5% more, the FHA loan doesn’t allow you to eliminate the PMI without refinancing (as I understand it… I’m no expert, just speaking from experience!)
I think you’re right. And the PMI is cheaper. We need an expert to chime in on that one!
Great tips. We definitely plan to look into first time homeowner programs when the time comes! I still want to have a really nicely sized downpayment before then, though.
Ditto to all of that!
I used the USDA home loan program, It’s only available if you are looking to live in rural areas, but you may be surprised what is considered rural. Mine was 0% down(I actually got a check at closing!), but I think you’re better off putting at least 10% down. I think it’s a good program overall.
Even though I purchased a very modest low cost home, lately I’ve been realizing more and more that I was much better off, financially at least, renting. Even though I’m a very DIY type of person around the house. Good thing I make OK money.