For many interested homebuyers, the reality of purchasing a home can feel like an abstract ideal. Since the housing downturn of the late 2000s, stricter lending standards, rising home prices, the growing luxury home market and student loan debt have all made buying a home a little less attainable for many aspiring first-time buyers. Perhaps the hardest personal hurdle to overcome is the ability to save the “standard” 20% down payment, which can increase the likelihood of receiving the most favorable terms for a conventional mortgage.
Historically, having a solid credit score and putting 20% down has been a gateway to obtaining the lowest interest rate, smaller monthly mortgage payments and avoiding private mortgage insurance. PMI is the fee on top of your monthly payment that lenders require from buyers who fall below the 20% threshold. But with a median home price in the United States of $258,300, according to the most recent data from the National Association of Realtors, what’s the likelihood of a new buyer having $51,660 at their disposal? Not likely.
“From what I see with first-time homebuyers, putting 20% down is quite rare,” said a New York real estate agent. “Usually, I see 5% and up.” In fact, the 20% benchmark is now atypical. According to a NAR survey, borrowers under the age of 35 on average financed their purchase with a 7% down payment.
How do homebuyers find the kind of capital they need for a down payment?
Buyers entering the market need to shake the myth that a 20% down is 100% necessary. Procuring a sizable down payment under 20% that avoids the need for private mortgage insurance and allows buyers to enter into a mortgage with reasonable terms simply requires taking the time to research your options. There is a myriad of city- and county-level programs — often supported by federal efforts — that make homeownership tangible. Luckily, these programs can be found in a vast amount of municipalities.
NeighborWorks America is a national organization of more than 240 nonprofits committed to catalyzing neighborhood and community development. Its network connects buyers with homeownership counselors that guide purchasers through the oftentimes confounding maze of federal, state and local programs available. In addition to teaching the basics of home financing and direct federal options, network members tailor the financing services to each location they work in.
There are assistance programs almost anywhere you live in America, with different sets of benefits and requirements. For example, the Hawaii Homeownership Center helps purchasers take advantage of programs like the City and County of Honolulu Down Payment Assistance program, which allows buyers to put as little as 5% down and work around private mortgage insurance by granting borrowers a down payment loan, essentially acting as a second mortgage.
In Chicago, buyers with incomes up to $133,000 can apply for the Home Buyer Assistance Program to receive a grant up to 7% of the total mortgage on any property type. Other locally driven programs include the Move-In Ready Program in Phoenix, which offers $15,000 in interest-free loans for formerly foreclosed properties that have been rehabbed with energy-efficient features. You can find additional programs directly through the Phoenix Housing Department or through nonprofits like Trellis, a member of the NeighborWorks America network.
An abundance of federal programs exist as well, depending on your situation. There are Federal Housing Administration loans that require as little as 3% down, home rehabilitation loans like the Limited 203(k) program that can provide up to $35,000 in assistance and U.S. Department of Veterans Affairs programs that guarantee loans from private lenders to ensure fair terms for vets.
“It’s all particular to the program and the client,” a New York real estate agent said. “Knowing the client, knowing the buyer and pairing them with the right lender.” Asking your real estate agent is the natural first step.
How can I tackle saving without the help of local or federal programs?
Beyond local or federal grant programs, there are other ways to save money to contribute to your down payment or eventual mortgage. Limiting spending is always a good start, but try engaging in some other creative methods of saving extra coins.
As an initial step, allocate an existing savings account for the sole purpose of homeownership or set up a dedicated account with the highest annual percentage yield. Investments in stocks and mutual funds with stable growth can serve a similar purpose as well. Apps like Acorns and Stash are designed to make saving and investing as uncomplicated as possible. Depending on your end goal, you can utilize these apps to store away small or large increments of cash at your own pace.
In some cases, universities and other employers offer down payment assistance, taking some of the burden of responsibility off your shoulders. Ask your human resources department if any such programs exist at your institution. If not, there are other ways to hack your paycheck to add to your nest egg. An employee can request that their employer divert a percentage of their automatic deposit to an account specifically allocated to save for a down payment, so that the cash isn’t as easily accessible to spend — and your savings builds with no effort.
Of course, endeavors like tapping into the gig economy can add extra income to your savings. From moonlighting as a ride-share driver to selling any clutter piling up, like clothing or jewelry, there are endless ways to make money that can fit your personal lifestyle.
With the array of financing options available, the stigma of the down payment melts away. Saving a large sum of money isn’t easy, but with knowledge of local and federal programs and creative ways to save, the biggest hurdle now is to assess your unique situation and find the best solution that will guide you to your next step toward homeownership.
Oct. 11, 2017, 12:42 p.m.: This story has been updated.
Correction: Oct. 11, 2017
A previous version of this story did not specify the part of the 203(k) Mortgage program that allows homeowners to finance up to $35,000 in repairs to their homes. That option is the Limited 203(k) program.