What Options are There for Securing Your Down Payment?

If you are looking to buy a home for the first time, you need to be aware of your options when it comes to down payments. One of the things that drives our universe is the principle of reciprocity. This principle also applies to when you’re making a down payment.

There is no "free for everyone" down payment option, despite what some people would like you to believe. Let’s first discuss a common type of scam, and then we will cover the legitimate options.

First of all, Beware "Free Money" Down payment Charity Organizations

These organizations work by the home seller making a "charitable donation" to the organization in the amount of the buyer’s down payment (plus an additional smaller fee). The organization would then give the buyer the needed down payment to the buyer as a "gift" that didn’t need to be paid back.

This may sound good on the surface, but the "gift" was not really free money. The truth is that the company added the down payment amount to the total purchase price. Example: if the home seller would normally sell the home for $500,000, he would sell it for $525,000 (5% down payment is $25,000).

So in the end, the buyer will be financing this "free gift", which is not really free at all since the buyer will be financing it as part of the mortgage (which the buyer is also paying interest on). Now that we’ve shown you that there’s really no "free" method, let’s look at the legitimate options that may be available under specific circumstances.

FHA Financing

Requires minimum 3.5% down. Closing costs can be gifted from a family member or nonprofit organization. This method requires upfront and monthly mortgage insurance.

Veterans Administration (VA)

If you are a vet and meet certain qualifications, you may be eligible for a zero down mortgage. No monthly mortgage insurance is required, but instead requires an upfront funding fee unless the vet is disabled.

United States Department of Agriculture (USDA) Financing

These zero down loans are typically given to those in certain rural, low income areas. With this loan there is still an upfront and monthly cost. This type of loan is split into two types: guaranteed housing loans and direct loans.

Conventional Financing

A conventional mortgage is one that isn’t backed by the government. These conventional loans are ones that are backed by Freddie Mac or Fannie Mae. For these conventional backed loans, 5% is the minimum down payment. Private mortgage insurance (PMI) is required unless there is a 20% down payment. This same rule also applies to homeowners refinancing with 20% equity.

Did we miss any good options? What is your favorite method of securing your down payment? Let us know in the comments below.