Not long ago, no-down-payment loans were the height of fashion for home buyers.
But now that lenders have tightened their standards, borrowers once again are expected to “put some skin in the game,” to use the industry's favorite catch phrase. That “skin” refers to the borrower's own cash, and it means down payments are definitely back in style.
The chief advantage of a down payment today is simply that it allows a person to qualify for a loan, since very few so-called “zero-down” loan programs still exist. Yet down payments have other benefits, too.
The more money you put down to buy a home, the smaller your monthly payments will be, explains Greg Gwizdz, national sales manager at Wells Fargo Home Mortgage in Des Moines, Iowa.
A buyer's down payment becomes a homeowner's instant equity when the purchase closes, and that equity can be borrowed against with a home equity loan or line of credit.
Many home buyers have difficulty coming up with a down payment. Here are several ways to do it:
Set up an automatic saving plan.
Get a gift from your parents, grandparents, other relatives or friends.
Sell a car, boat, motorcycle, collectibles or other assets.
Liquidate stocks, mutual funds, savings bonds or other investments.
Allocate your income tax refund.
Take a loan from your 401(k) retirement plan and repay yourself with interest.
Withdraw funds from your 401(k) plan, subject to taxes and penalties.
Collect on a loan that you made to someone else.
Get a bonus from your employer.
Explore home-buyer programs for teachers, police officers, firefighters and other public servants, if you qualify.
Apply for a state or local government home buyer down-payment program.
Use a private down-payment assistance program.
A down payment needs to be “sourced and seasoned,” Gwizdz says. That means the lender needs to know how you obtained the funds and that you've had control of those funds for at least several months. Gifts and seller's concessions are acceptable, up to the percentage allowed by the loan program, but borrowed money can't be used as a down payment because it is debt that has to be repaid.
Two government-run programs are designed to aid home buyers who haven't saved much for a down payment. The Federal Housing Administration offers mortgage insurance that allows qualified buyers to purchase a home with a 3 percent down payment, all of which may be a gift. The U.S. Department of Veterans Affairs offers a home-loan guarantee program that helps military veterans buy a home with no down payment.
Down-payment programs run by state and local housing authorities offer grants and low-interest deferred-payment loans to home buyers, though the restrictions can be “pretty severe,” says Ed Craine, CEO of Smith-Craine Finance, a mortgage company in San Francisco. Some programs require borrowers to live in a disadvantaged neighborhood. Others have income limitations, for example.
“The biggest problem tends to be that if you make enough money to qualify for a loan, you probably make too much money to get the down-payment assistance,” Craine says.
