Low down payment mortgage options for first-time homebuyers

Here’s how to get help making your down payment. (iStock)

Even if you find the best mortgage rates, saving for a down payment is one of the biggest challenges when it comes to home buying. Luckily, there are several low down payment mortgage options available to help cover the upfront costs of buying a home. If you’re looking for down payment assistance, read on to learn which course of action might be the best one.

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Low down payment mortgage options

For those on home buying journeys who are currently seeking lower down payments, your first step should be to investigate your mortgage options.

  • VA loans, which are backed by the Department of Veterans Affairs, and USDA loans, which are backed by the United States Department of Agriculture, offer 0% down payment loan options for qualified buyers. With these, you can finance up to 100% of the home’s purchase price.
  • FHA loans, which are backed by the Federal Housing Administration, offer loan programs with down payments as low as 3.5%.
  • Fannie Mae and Freddie Mac also offer conventional loans with down payments as low as 3%.

However, be aware that financing such a significant portion of your home purchase often comes with additional terms and fees. All FHA loans require a monthly mortgage insurance payment, as do any conventional loans where the down payment is less than 20%. VA loans, on the other hand, come with a “funding fee” that will need to be part of your budget.

To see what mortgage rates are currently available, an online marketplace like Credible can help you view all your loan options in one place without impacting your credit score.

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State and local down payment assistance

In addition, many state and local municipalities offer down payment assistance programs — many of which are specifically meant for first-time homebuyers. The way in which these programs work will vary, but most often, the down payment assistance is either given in the form of grants or a forgivable loan.

Your best bet for getting a sense of what first-time homebuyer programs are available in your area is to talk to a loan officer. He or she will be able to take a closer look at the specifics of your financial situation to determine which program might be the best fit for you.

Credible can help you get in touch with experienced mortgage lenders who will help you answer any mortgage questions.

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Down payment gifts and loans from family

In real estate, it’s not uncommon for first-time homebuyers to get gifts from family in order to increase the down payment. While most loan offers are very familiar with down payment gifts, it’s important to note that getting one is a bit more complicated than just depositing a check into your account.

If the down payment money is a gift, your lender is going to want to collect some financial information from the family member who’s giving you the funds. In particular, he or she will want to see proof of any assets, as well as proof of the transfer of assets from one account to the other.

If the down payment money is a loan, things get a little trickier. In that case, your lender will need to calculate the loan payment into your debt-to-income ratio in order to ensure that you still qualify to buy the home.

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Using retirement funds for a down payment 

Since so many people are already behind on saving for retirement, financial planners usually don’t recommend using retirement funds for a down payment. However, it can be done, but be aware that you may face significant tax penalties for taking money out early.

Here’s what you need to know:

  • 401(k): Employer-sponsored plans do allow for early withdrawals, but you’ll have to pay income tax on any amount that you borrow, plus an additional 10% for the early withdrawal. Some plans will allow you to take out the money as a loan, which will give you up to five years to repay it. However, if you leave your job, you’ll have to refund the money by the next tax filing deadline. Otherwise, you will have to pay taxes and a penalty on the money.
  • Traditional IRA: You can withdraw up to $10,000 from a traditional IRA for the purpose of a home purchase and, while you will have to pay income tax on the amount, you won’t have to pay a penalty.
  • Roth IRA: As long as you’ve had the account for at least five years, withdrawals from a Roth IRA are free and without penalty.

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What are today’s mortgage rates?

Before getting into your down payment options, it’s crucial to discuss current mortgage rates. Ultimately, the mortgage rate you receive on your home loan is an important factor in financial planning because it will have an effect on the size of your monthly payment, along with your down payment and any mortgage insurance that might be required.

As of the time of writing, the average interest rate on a 30-year, fixed-rate mortgage is just 2.86%, making it a fantastic time to buy, as long as you can also afford the upfront costs.

If you’re ready to take the next step, visit Credible to compare rates and mortgage lenders as well as to investigate what payment options could work for you (and your savings account).

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You can also use an online mortgage calculator to get a sense of what your monthly payment might look like.