Many renters mistakenly believe that in order to become homeowners they have to put a large down payment on a home.
I suppose this misconception stems from the realities of financing homes decades ago. Back then, banks required a 20% down payment and only those diligent enough to save up a big chunk of money ultimately got a home.
Today, however, the entire mortgage market is drastically different. Gone are the days when banks only offered a standard 30-year fixed-rate mortgage.
Now you can get an adjustable-rate mortgage, as well as any variety of so-called “hybrid” loans – those that combine features of both ARMs and fixed-rate mortgages. Plus, many lenders realize that if they required everyone to put down 20% on a home, millions of people would never become homeowners.
Therefore, banks got creative and less strict in their down payment requirements. Today, you can buy a home with 10% down, 5% down, or even just a 3.5% down payment with an FHA loan.
Believe it or not, before the credit crunch and the mortgage meltdown began in late 2007, 45% of first-time home buyers got into their homes with 100% financing deals – meaning they put no money down, according to the Mortgage Bankers Association. Of course, times are different now.
And banks are again tightening their credit policies. So the average first time buyer now puts forth a 3.5% down payment toward the purchase of his or her home. Surely you can save up a 3% down payment if you’re committed to being a homeowner.
In dollar terms, here’s how everything breaks down.
According to November 2009 data from the National Association of Realtors, the national median price for an existing home in the U.S. was $172,600. (The median price means that half of all homes sold for above that price, and half sold for less than that figure.) So let’s look at how much money you’d need at different price points.
Assume you live in Texas, where you might snag a home for about $140,000:
To have a 3% down payment, you must save: $4,200
To have a 5% down payment, you must save: $7,000
To have a 10% down payment, you must save: $14,000
To have a 20% down payment, you must save: $28,000
To buy a home $230,000 in the United States, here’s what you’d need:
To have a 3% down payment, you must save: $6,900
To have a 5% down payment, you must save: $11,500
To have a 10% down payment, you must save: $23,000
To have a 20% down payment, you must save: $46,000
With a $500,000 home, in pricey locations like New York, here’s what you’d need:
To have a 3% down payment, you must save: $15,000
To have a 10% down payment, you must save: $50,000
To have a 20% down payment, you must save: $100,000
I know a lot of these numbers look very daunting. But remember: there are many down payment assistance and grant programs available for first-time homebuyers nationwide, including some offering as much as $30,000 to $40,000 to help with a home down payment and closing costs. Additionally, many lenders will allow you to use gift money – from family members or friends – in order to qualify for a mortgage.
Excerpted from Your First Home: The Smart Way to Get It and Keep It.