One of the greatest financial struggles a family ever faces is making the down payment on a first home. A down payment of 5 percent is really just the beginning. In addition, there are closing costs that can easily total 2 percent of the purchase price. On top of that, the underwriter will want to be certain you have adequate cash reserves to make a couple of payments to protect you against the interruptions in your cash flow.
If you are hoping to buy a $150,000 home, you'll need at least $7,500 for a down payment, another $3,000 or so for closing costs and another $2,000 or so in cash reserves or a total of about $12,500.
The following are some tips to help you save for your down payment or reduce the requirements.
FHA Loans
FHA Loans require only a 3.5 percent down payment. FHA loans are insured by the Federal Housing Authority. In some cases, interest rates may be fractionally higher, but for first-time home buyers struggling with a down payment, any slight difference probably less important than the smaller down payment. Not all lenders offer FHA loans. If you are struggling with the down payment, be sure to work with a lender that can offer an FHA loan.
Seller Pays Closing Costs
As you work with your real estate agent, talk to her about having the seller pay your closing costs - even if you have to add them to the purchase price. In a seller's market, where sellers get their way on everything, this may not be an option. In a buyer's market, where buyers get their way on everything, you can probably offer less than asking price and still get the seller to cover the closing costs.
Sell your car
If you have two cars and can get by with one, sell the other one. If you can get some cash for the down payment and pay off the car loan at the same time, that can help you maximize your ability to qualify for the mortgage.
Mom and Dad
It is common for parents to help their adult children with getting into a first home. There are two basic ways in which parents can help. Obviously, parents may make a gift of cash for the down payment. Alternatively, they can invite you to live in the basement for a year while you forgo rent and accumulate a down payment. Even if you didn't get this sort of help from your parents, you may consider helping your children. A successful financial launch into adulthood by purchasing a home can provide tremendous stability for a family over the years.
By combining all of these strategies for reducing a down payment requirement and saving for it, the challenge may seem less difficult. Rather than needing $12,500, you may be able to get by with just $7,500 or so. Selling a car and saving on rent may quickly combine to provide you with the down payment for your first home.
