Ways homebuyers can leap the down payment hurdle

Saving up for a down payment is the biggest hurdle for many would-be homebuyers, particularly those looking to make the leap from renting to owning.

More than two-thirds of renters consider setting aside money for a down payment the No. 1 obstacle to buying a home, according to a recent survey by real estate data provider Zillow. That edged out other concerns, including job security and a thin supply of homes on the market.

While there are home loans that require as little as 3 percent down, rising home prices, especially in expensive coastal states, keep driving up the amount of money buyers need to come up with for a down payment.

Even so, many first-time buyers are managing to save enough on their own. Some 76 percent used their savings to fund their down payment last year, according to the National Association of Realtors.

Here are some tips to consider when working toward that down payment on a home:

START SOON

Begin saving now. Renters may want to calculate what their extra monthly costs would be as a homeowner and then set aside that amount, minus rent and utilities. This accomplishes two goals: Saving money for a down payment and getting you accustomed to the financial constraints of living with the costs of homeownership.

Another strategy that may help: open a separate savings account just for your down payment. That will help lessen the temptation of using the funds for something else.

You'll also have to set aside money for closing costs, which can run into the hundreds or thousands of dollars.

WEIGH LOAN OPTIONS

The type of home loan you get may determine how much of a down payment you need. For many years, buyers sought to put down 20 percent of the purchase price. That would lower their monthly mortgage payment and allow them to avoid having to pay for private mortgage insurance, or PMI. But as home prices have risen, that trend has waned. Loans that require as little as 3 percent up front have become more common. As a result, the median U.S. down payment has declined to 10 percent the past four years, according to the NAR.

"The housing market is not a matter of 20 percent down payment or bust," said Greg McBride, chief financial analyst at Bankrate.com. "You can get into a house with a low down payment, but you're going to have to come up with the money for closing costs."

Lenders offer loans backed by government mortgage companies Fannie Mae and Freddie Mac that require only a 3 percent down payment. Borrowers can ask to have their PMI waived once the equity in their home reaches 20 percent.

Borrowers with less-than-sterling credit may have a better shot qualifying for loans backed by the Federal Housing Administration. The FHA's program requires 3.5 percent down, but borrowers have to refinance once their equity grows above 20 percent in order to get out of paying PMI.

Buyers may not need to save for a down payment at all if they are U.S. military veterans, servicemembers or residents of certain rural areas. The Department of Veterans Affairs and the U.S. Department of Agriculture have zero-down payment loan programs for qualified borrowers.

EXPLORE OTHER OPTIONS

Saving for a down payment sometimes takes more than cutting back on dining out or travel. A quarter of first-time homebuyers in 2016 used gift money from relatives or friends to round out their down payment, according to the NAR. And more than 10 percent tapped their retirement savings without the usual hefty penalties for an early withdrawal. Of course, before withdrawing money from your 401(k) or IRA accounts consider that a big withdrawal will mean your retirement savings won't grow as swiftly.

Borrowers with low or moderate income, and teachers, firefighters or other public service job holders may also qualify for down payment assistance through thousands of federal, state or local programs aimed at helping homebuyers.

There are more than 2,100 funded programs, many of which help cover the down payment and closing costs through loans that can sometimes be forgiven over time, or paid back only once the buyer sells the home, according to Down Payment Resource, a tracker of homebuyer assistance programs.

CONSIDER USING HOME EQUITY

A newer approach to coming up with a down payment involves letting investors put up some of the money in exchange for a slice of the potential value in the home.

San Francisco-based Unison now has a program available in 12 states and the District of Columbia that offers to match up to half of a 20 percent down payment on a home. The match isn't a loan, in that the buyer doesn't have to make payments, but still benefits from the lower cost of making a 20 percent down payment.

There are several payback scenarios, but essentially the company collects a 35 percent share of the gain, if any, in the sale of the home. Should the home decline in value, the company also shares in the loss, potentially receiving less money back on its original investment.

If the homeowner hasn't sold the home after 30 years, a property appraisal is used to determine how much Unison gets paid. The homeowner also has the option to buy out Unison any time after their third year in the home. Unison also doesn't share in the equity that the homebuyer builds as they pay down their mortgage or from investments, like a kitchen remodel.

"There's a very clear trade off here in that you are surrendering future equity," said McBride, noting that home equity is increasingly becoming Americans' principal way to fund their retirement. "So, look yourself in the mirror and make sure that you're not potentially shortchanging your future financial security just to get into a slightly more expensive home now."

The possibility of losing a big slice of her home's future value didn't put off Courtney DeAnda from using Unison to double the $52,000 down payment on a home this month.

She and her husband, James, who have three kids, recently entered escrow on a five-bedroom, three-bath house in Vacaville, California, for $468,000. The couple expects to save $417 a month on their mortgage payment by using the Unison program.

"It's a price to pay to help us get into a home that we really love," said DeAnda, 28. "We really don't see much of a negative with using it."

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This story has been updated to remove the reference to private mortgage insurance being tax deductible.