Tips for Buying a House Without a Large Down Payment
If you are looking for your first home, then you may be overwhelmed by all of the options in front of you. Buying real estate is exciting, but it is also a little scary and confusing. One thing you may be confused about is the down payment on the home. You may think that a new house is out of reach if you have only a little bit of money saved up. This is not always true. Keep reading to learn about a few things that may help you get into the house of your dreams.
You Can Get a Loan with a Minimal Down Payment
If you go to your local bank and speak to a loan officer about acquiring a mortgage, then you may find out that you need a 20% down payment on a home. While there are certainly advantages to securing this type of payment, it may be incredibly difficult for some people to save $20,000 for a $100,000 house. If this is your concern, then you can apply for a mortgage with which you only need a 3% or 3.5% down payment. Public and federal organizations like the Department of Veterans Affairs and the Federal Housing Administration as well as private institutions like Fannie Mae and Freddie Mac offer these types of loans. Even the USDA will offer loans with low or no down payments as long as you purchase a home in a rural area.
If you do apply for a loan with a low down payment, you will need to meet the guidelines to receive the loan. Specifically, the loan company will look at your income closely to make sure you can comfortably make loan payments without placing undue financial stress on yourself.
If you do decide to go with a loan with a low down payment, you will need to be prepared to make large mortgage payments each month. Also, you will need to purchase something called private mortgage insurance. This insurance protects the lender from financial loss if you decide not to make your mortgage payments. The insurance rate can vary, but it is typically a set percentage of the original loan. The rate is likely to vary from about 0.3% to 1.5%. This means that you will have to pay at least an extra $300 a year for the home.
Fortunately, you do not have to pay this extra fee for the entire length of the loan. Once you pay down about 20% of the full cost, you can cancel the insurance.
You Can Ask for a Gift
If paying an extra $300 or more each year does not sound appealing to you, or if you feel that your mortgage terms are too long or too high, then you can try to gather the 20% down payment from an outside source. Down-payment gifts are extremely common, and many individuals ask their parents for them. If a gift is provided, then you should be aware that any monetary parental gift that exceeds $14,000 is subjected to a gift tax. This tax must be paid by your parents or whoever the giver is and given to the IRS.
If you want to borrow money from a parent for a down payment, then this is an option as well. If you decide to loan the money, then you will need a promissory note that outlines the loan and the interest rate on the loan. Loan-repayment schedules are a good idea as well. The document will then need to be signed by you and your parent. While many parents do not want to charge their children interest on loans, interest is typically required for the government to recognize the money as a loan and not a gift.