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How can you save down payment cash in today’s real estate market? It can be done, it’s not impossible.
In July, for example, the National Association of Realtors (NAR) reported that 30% of all existing home sales were made by first-time purchasers, individuals who needed down payment cash.
First-time buyers are often facing two problems. First, because of inflation it’s tough to save.
Americans had a personal savings rate of 3.5% in July 2023, versus 9.1% in January 2020 before the pandemic started and when interest rates were much lower.
Second, the combination of steeper home prices and rising interest rates has driven up monthly mortgage payments, making affordability a major hurdle.
Mortgage rates moved from a record low of 2.65% in January 2021 to 7.18% in mid-September 2023. Even if home prices had stayed the same, monthly payments for principal and interest soared.
If you borrow $250,000 at 2.65% over 30 years the monthly payment is $1,007. Raise the rate to 7.18% and the monthly cost swells to $1,694 – a huge jump. Increase the debt to reflect rising home prices and the monthly cost is even larger.
Okay, so how do first-time purchasers raise down-payment cash? There’s no universal answer, but several strategies stand out.
The Usual Advice
The usual advice is to save, eat at home, live simply, save some more, put in more hours, own a good collection of hot dog recipes, and hunker down until you have the required cash.
This approach is boring, but it’s not wrong. Sometimes to get the financial things you want there must be sacrifice.
Of course, no one is saying you can’t also use other methods to reach homeownership.
Assume An Existing Loan
Between 1981 and the start of 2021, fixed rates for mortgages generally declined, moving from 18.53% (honest – that’s not a mistake) to 2.65%. Because of this general downward trend, there wasn’t much interest in mortgage assumptions – taking over an existing loan with its existing interest rate.
Now – with mortgage rates rising during the past few years – assumptions are back. Qualified borrowers can assume FHA, USDA, and VA mortgages, sometimes with rates below 3%.
What’s allowable in theory may be tough to get in reality. For example, a home is selling for $400,000. The current owner has a 3% FHA mortgage with a $250,000 balance.
Most first-time borrowers do not have $150,000 in cash to buy the property. ($400,000 less $250,000 = $150,000).
What to do? Make a down payment, say 5% ($20,000), assume the first loan ($250,000), and get a second loan for the balance ($130,000). The benefit? A blended mortgage rate far below current levels and thus lower monthly costs.
» MORE: See today’s refinance rates
Get Financing With Little Down
Many lenders would like you to buy with 20% down, a number that’s impossible for large numbers of buyers.
The good news is that many mortgage programs require a lot less: VA and USDA loans require 0% down, the HomeReady (Fannie Mae) and Home Possible (Freddie Mac) programs are available with 3% down, and the FHA program asks for just 3.5% down in most cases.
While financing with little down is available, take a careful look at up-front program fees and monthly charges, if any. It’s often far easier for many borrowers to make bigger monthly payments than to accumulate a large down payment.
Look For Seller Contributions
It’s no longer a seller’s market in many areas. Existing home sales are down.
In August 2023 they were off by 15.3% when compared with a year earlier, according to the National Association of Realtors. Buyers in many areas can now bargain and so-called “seller contributions” might be on the table.
A seller contribution is an owner concession. How much is involved depends on the buyer’s bargaining power and what’s allowed by lenders.
For instance, FHA and USDA loans allow a seller credit of as much as 6% while the VA is limited to 4%. Conforming loans acceptable to Fannie Mae and Freddie Mac allow seller concessions based on the amount down, anywhere from 3% to as much as 9%.
Sellers, of course, are not going to gleefully offer financial concessions. Buyers will have to bargain. Also, the money can be used to offset closing costs and other expenses but not down payments.
Still, even a small percentage of $400,000 can be a lot of cash to the buyer.
Buydown The Loan
Interest rates are not set in stone. They can be negotiated, especially if you have strong credit and a big down payment.
It’s also possible to “buy down” the mortgage rate. In effect, you pay money upfront – perhaps from a seller concession or another source – and in turn the lender reduces the rate.
What might be especially interesting is a temporary buydown. Instead of a lower rate for the full 30-year loan term, perhaps a buydown for two or three years will be more attractive – and less expensive.
For instance, in exchange for an upfront payment, a lender might agree to a 3% lower rate in the first year, 2% in the second year, and 1% in the third year.
Get Down Payment Assistance
There are thousands of down payment assistance programs nationwide. Generally, such programs are available to qualified borrowers who have not owned property for the past three years.
The programs include grants, forgivable second loans, smaller down payments, and interest-rate reductions. For details and specifics, check with local real estate brokers.