Twenty-five percent of first-time home buyers say that saving enough to cover the down payment and closing costs was the biggest struggle they had to overcome to purchase their first home. These first-time home buyers took the plunge and connected with real estate professionals to find the way to make their dream of home ownership possible.
Many individuals don’t realize that down payment and closing cost assistance even exists. There are many potential first-time home buyers who have the income and credit scores to qualify for a mortgage, but don’t explore their options. They assume they don’t have enough saved to cover the down payment and closing costs. In fact, many potential first-time home buyers don’t even have a reasonable figure for down payment and closing costs, so they can’t even establish a target to work towards!
Here in Central New York, the median residential home price ranges from $95,000 – $143,000. For planning purposes, down payment and closing cost expectations fall into the range of eight to twelve thousand dollars. Down payment and closing cost assistance, when utilized, will reduce the actual out-of-pocket cost at the closing table. The next sections identify specific down payment and closing cost assistance programs available and the associated savings one could deduct from the expected cash required at closing.
Minimum Down Payment varies based on the loan program chosen when applying for a mortgage. Contrary to misconceptions many people hold, you don’t need to put 10% -20% down to purchase a home. There are conventional loan programs that allow as little as 3% down and many government back loan programs will allow 3.5% down. SONYMA allows 3% down as a minimum. VA and USDA programs will allow you to make no down payment at all. Based on the median sale price and the potential to save 3% – 3.5% on a down payment for a VA or USDA loan, a potential home buyer could reduce their cash required at closing by $3,300 – $5,000.
Seller Concessions is a confusing term, but it is the most widely know term for generating closing costs for a buyer. An alternate term is buyer financed closing costs. The basic concept is to add an additional amount to a buyer’s mortgage above the seller agreed to sale price. This amount does not go to the seller. It remains with the buyer at closing to be used for the buyer’s closing costs. The seller agreed to sale price plus the seller concessions results in the stated sale price. The various loan programs have different maximum seller concession limits that are usually expressed as a percentage of the stated sale price. These percentages typically range between 3% – 6%. When the appraisal is high enough to cover the mortgage associated with the higher stated sale price, $3,000 (3%) – $8,000 (6%) could be made available to reduce the buyer’s required closing costs.
Gifting can be utilized by a buyer to generate funds to be used for closing costs, but not down payment requirements. If the funds are provided by a blood relative of the buyer and an affidavit is provided stating that the funds represent a gift and not a loan, most loan programs will allow gifting up to the actual closing costs required by the buyer.
Down Payment Assistance Loan or Grant is available from some government backed mortgage loans, individual banks or special programs. This is a grant provided for first-time home buyers for 3% of the sale price (usually subject to a maximum amount) providing the buyer occupies the home for five (typical) years. The funds are provided as a second loan with a lien against the property for five years. After five years, the lien is removed, and the buyer owes nothing. If the buyer fails to continuously occupy the home for the five-year period, the buyer must repay the amount of the loan or the remaining prorated portion.
Buyer Down Payment and Closing Costs Savings Plans are offered by many local credit unions and banks. According to financial institution rules, a buyer agrees to a regular savings plan for a pre-determined period of time (usually 10-24 months). As long as the buyer makes the required regular deposits, the financial institution will provide an additional lump sum at the satisfactory completion of the savings program. These programs usually require the buyer to take some classes relating to finances, budgeting, home ownership, etc. These programs can typically create $7,000 or more for the first-time buyer with the financial institution providing up to $4 for every $1 the buyer deposits.
Special Financial Institution Programs are sometimes offered for first-time home buyers. These programs are varied and can appear or disappear based on the financial institution’s needs and objectives. As an example, one local lender offers first-time home buyers a low interest rate with no mortgage related closing costs.
All these programs have requirements and trade-offs. Each program may or may not be able to be combined with other programs. Your mortgage consultant has the familiarity with these programs and can make recommendations for your situation and needs. Because some programs are lender related, it is a best practice to shop for your mortgage by getting a review from at least three different lenders. Just be sure to do this in a short period of time, otherwise, your credit score could be impacted in a negative way. Multiple credit report inquiries in a short period of time (4 – 6 weeks) for the same purpose usually does not impact your credit score any more than a single credit report inquiry. Besides, many lenders offer gift cards just for a second look, whether you choose them or not. That’s even more money in your pocket!