Owning your own home has always been a big part of the American dream. This can be seen in the fact that home ownership rates in the US are so high. Since the 1960s, a solid 60% or more of the population has lived in owner-occupied homes.
Is that trend changing with the millennial generation?
Millennials now range from 21-37 years of age. This means that the bulk of the generation has entered the prime homebuying stage of life.
But yet millennial home ownership rates are only 37%, about 8% less than both Gen Xers and Baby Boomers at the same age.
Many factors play into why people choose to or choose not to buy a home. One of them for many people could be the cost.
Enter down payment assistance.
Are you a millennial who would love to buy a home but are struggling to save a big enough down payment? Then keep reading to find out what options are available.
What Is Down Payment Assistance?
First of all, let's take a look at what down payment assistance is. Simply put, it's any form of help putting down a down payment on a house. Of course, the actual way it works is a lot more complex than that.
We're going to get into that more in a minute.
How Much Do You Need for a Down Payment?
Most people think that they need a 20% down payment in order to get a mortgage on a home. That means for a $300,000 home you would have to have $60,000 available for the down payment.
That's a significant chunk of change.
Thankfully, as the housing market improves, lenders have moved away from requiring such a high down payment. Now there are many options that require far less of a down payment.
Some of these include the government-backed
Also, some lenders offer options such as the Home Ready and the Piggyback Loan programs. All of these are designed to reduce your need for a down payment.
Why Pay a Down Payment?
If there are so many options for avoiding a down payment, why bother putting money down?
There are several benefits you can gain by bringing money to the table. First off, the total loan amount you'll need is reduced so you'll have a lower monthly payment.
Plus, mortgages with a low or no down payment typically require the borrower to pay mortgage insurance. Mortgage insurance isn't the end of the world, but it does add to your monthly payment and the full cost of your loan over time.
Thus, being able to bring a down payment is a good financial move.
But what if you don't have it? That's where down payment assistance comes in.
Types of Down Payment Assistance
There are a few different types of down payment assistance programs. Which programs are available to you will depend on your financial situation and where you are looking to buy.
These programs are typically sponsored by state housing finance agencies, local housing authorities, and community organizations so location is very important.
Let's look at some common types of down payment assistance that may be available in your area.
Let's talk about the best type of down payment assistance first-the free kind. Yes, down payment assistance grants are free money that you don't have to pay back.
The crazy thing is, most people don't think they would qualify for a grant so a lot of this money goes unused. This is because people naturally assume that free money is only available to low-income earners.
However, even borrowers who earn more than the area's median income may qualify for a grant. In some places, you can qualify for 5% of the home's purchase price.
That's quite a chunk of change! In short, it never hurts to ask.
Down Payment Loans
More commonly, there are loans available as down payment assistance. However, these loans work differently than your typical loans.
There are three basic kinds of down payment loans you can get. They are all considered smaller second mortgages.
The first type requires you to start paying on the loan right away. You pay it down at the same time as your primary mortgage.
The second type defers the payments on your second mortgage until one of three things happens
- You sell your home
- You refinance
- You pay off your first mortgage
The third type will forgive the second mortgage payments over a set number of years. For example, a certain percentage may be forgiven at 5, 10, or 15 years.
What if you sell your home, refinance, or finish paying off your first mortgage before these milestone years? Then you will be responsible for whatever percentage of the loan hasn't yet been forgiven.
Many of these loans are actually interest-free options. Even though the down payment loan is significantly smaller than your first mortgage this can still translate to significant savings over the life of your loan.
However, be sure to read the fine print. These loans can have interest rates. Sometimes the rate is lower than your regular mortgage, other times it is higher.
Some lenders offer borrowers in-house assistance. They may offer their own program with a dramatically reduced down payment requirement. Or they may offer a type of second mortgage loan like the ones we've already described.
Closing costs are another expense to worry about. Usually a percentage of the sale price of the home, these fees can easily be several thousand dollars. You're going to need to know where that money will come from.
Some types of down payment assistance will allow you to use the funds from their program to cover closing costs. If you think you're going to need help paying those costs, be sure to find out what you qualify for ahead of time.
There's also the option of getting sellers to pay your closing costs. It's customary for both the seller and the buyer to pay a portion of these costs. However, this is entirely negotiable.
Play your cards right and you can get the seller to take care of this pesky expense. However, keep in mind that the seller won't do this out of the goodness of their heart. If a seller agrees to pay closing costs, that's usually because they've added that expense to the sale price.
In other words, you'll still pay it but now it's a part of your mortgage so you can pay it off over time rather than all at once.
Can You Qualify?
It's important to note that there are two components to the qualification process. Both you as the homeowner and the house itself will have to qualify for the program you're applying to.
First, your financial situation will have to qualify. This varies quite a bit depending on the program, but they will all look at these things
- Your income as it compares to the area's median income
- Your cash reserves
- Your credit score
Many programs (though not all) reserve their funds for first-time home buyers. However, the definition of a first-time home buyer is one who hasn't owned a home in 3 years.
So even if you've owned a home before, you may still qualify.
Most programs also will require you to take a home ownership education course. Many accept online courses so this usually isn't too difficult a requirement to meet.
There are also a few requirements for the home. First off, it must be your primary residence. These programs are not for people looking to invest in rental properties and the like.
With that in mind, the home should be a single-family home, town home, or condo. However, in some cases, a multi-family residence can qualify if you will be living in the home.
The location of the home is also very important. As we touched on earlier, many of these programs are offered by local organizations.
Plus, some areas are considered "target" areas where it is easier to get assistance, or you can get a higher amount.
Lastly, the sale price must fall under the limit. This limit varies and is typically a percentage of the median sale price for the area.
Down Payment Assistance in Washington
Home prices in Washington State have been on the rise. Since December 2016, the area had the fastest climbing home prices in the country. In May of 2018, Nevada overtook Washington but that doesn't mean the market has cooled down by any means.
Thus, if you're seeking to become a homeowner in this hot market, a down payment assistance program will probably come in handy.
Check out one of the 9 programs offered by the Washington State Housing Finance Commission.
Also, don't forget to check out area-specific programs. You may be able to qualify for up to $55,000 of assistance if you're buying a house in Seattle!
Ready for Home Ownership?
Maybe you thought that home ownership was an impossible dream for you. But the help of the right down payment assistance program, that dream might become possible.