First Time Homebuyers: How to Get Help with a Down Payment

You may be ready to buy a home and already narrowed down your options but without enough money for a down payment, you'll have to wait a little bit longer. However, you shouldn't lose hope just yet. There are several options for first-time homebuyers to get help in raising a down payment. Being aware of these options means you can pick the one that suits your needs the best. Here are some of the options you can go for:

Low-down payment mortgages

Lenders have been asking for a 20% down payment in most cases. However, there are several low-down payment options especially if you are buying your first home. They include:

• VA loans. These loans are backed by the Department of Veterans Affairs. You can also go for USDA loans that are backed by the Department of Agriculture. If you qualify for these loans, you will enjoy a 0% down payment option.
• FHA loans. These are backed by the Federal Housing Administration, and they can allow you to pay a 3.5% down payment.
• Conventional loans. There aren't backed by the government but in this option, your down payment can be as low as 3% as long as your credit score is stellar

If you don't have to raise a big down payment it means you can move into your new house faster and start building equity.

State and local down payment assistance

In every state, there are down payment assistance programs usually implemented by employers, foundations, government agencies, and even nonprofits. The assistance will be in the form of forgivable loans, grants or even zero-interest loans. The programs can be focused on just a single city or offer help to everyone in the nation. Some target specific neighborhoods or even houses. Often, it's about matching a property to a certain program depending on the price and location of the home.  Down payment assistance will come with tax breaks and favorable mortgage rates in most cases. Applicants may also have to enroll in first-time homebuyer classes in to learn about successful homeownership.

Down-payment loans and gifts from family

Some first-time homebuyers get help from their family in raising the down payment. 28% of first-time homebuyers below 28 years of age got help in paying the down payment from their families while 21% of those aged 29-38 used a gift.  Lenders accept down payment gifts, but it isn't just about depositing a check. There are a lot of documents required in this process to satisfy a lender's requirements.

The donor will have to put it down that the money was a gift and that their financial status allows them to make such a donation. This means they must submit their bank statements to prove their financial stability as well as a letter that states that the money was offered as a gift and not a loan.  The lenders require all these documents because if the money provided will have to be paid back it affects the debt-to-income ratio of the borrower which has to be factored in when processing the mortgage application.

Crowdfunding a down payment

Nowadays, crowdfunding has become more common than before. You can use this option to raise money for all sorts of occasions from paying school fees to even getting money for food. Some sites allow you to build an online profile to crowdfund for a down payment. However, it is a service mostly targeting newlyweds and engaged couples.

Some sites also require you to get a pre-qualification for a mortgage then you proceed to crowdfund for the down payment. You may even win a closing cost grant of up to $1500 as well as a free homebuyer education.

As much as this seems like an easy option you shouldn't get too excited just yet. You need to watch out for hidden obligations or fees when using this option. Ensure you know all the terms and conditions and that they sit well with you so that you won't end up regretting later.

Withdrawing from your retirement account or leveraging it for a loan

Some first-time home buyers tap into their retirement savings for a down payment, but this option should be used as a last resort. Some of the rules and regulations that come with this option are:

• Roth IRA withdrawals are tax-free, and you won't be penalized if you are buying your first home and the account has been active for at least 5 years.
• Traditional IRA withdrawals for the sake of first-time home purchases are allowed but a cap of $10,000 is placed. Nevertheless, you will have to pay income taxes for the money you have withdrawn and there won't be an additional penalty as long as the money goes towards building or buying your first home.
• Employer-sponsored 401(k) plans may allow for loans or early withdrawals but there is a 10% tax penalty, and you'll have to pay income taxes as well. If you are taking a loan it must be repaid with interest to avoid a penalty and income taxes.  Some plans will allow you up to 5 years to make the repayment. In case you leave your job, the loan can be rolled into an eligible retirement account or repaid by the next tax filing deadline. Otherwise, you'll have to pay taxes and a penalty on the money you borrowed.