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First-time Home Buyer? Don’t Get Hung Up by That 20% Down Payment
The New York metro real estate market has seen big shifts since the COVID-19 pandemic hit the area, with many city dwellers seeking out the suburbs to get away from crowded urban areas. They now want open space and great quality of life at a better cost of living when compared to NYC.
Another shift is the population making the move: in New Jersey, there are 1.8 million millennials (between ages 24 and 39) who make up 72% of today’s housing demand. The average age of these home buyers is 32.
This is also a group that’s paying off student loans, have been paying high rental rates, perhaps have started a family or paid for a wedding . . . and therefore, they don’t have the 20% down payment saved up. With prevailing home prices in northern New Jersey, that figure could be as high as $65,000 (or more) depending on type and location of the home. According to mortgage industry executive and videocaster Barry Habib, 74% of millennials are ready to purchase a home within 12 months but 88% say they have significantly less than 20% of the sale price saved up for down payment. In fact, 14% state they have nothing saved up.
What’s a young first-time home buyer to do?
FHA-backed mortgages for first-time buyers
If you’re a millennial buying your first home, don’t despair—this is not your father’s real estate market anymore and that includes the types of home loans available. Has your real estate agent mentioned FHA loans? These federally guaranteed mortgages enable you to put down far less on a home. In fact, you can have as low as 3.5% of the purchase price to put down, and less-than-perfect credit to qualify for an FHA loan (the minimum credit score is 580 to qualify, unless you are putting down at least 10%). As with all mortgages, the lending institution will make the determination regarding loan qualification.
You’ll pay higher costs on the transaction, but these loans are the leg up many young buyers need to realize the dream of home ownership.
What is the FHA
FHA stands for the Federal Housing Administration, an entity of the Department of Housing and Urban Development. It provides mortgage insurance on loans made by FHA-approved lenders on single family and multi-family homes in the U.S. FHA-backed mortgages are also available to certain borrowers who have filed bankruptcy or foreclosed on a previous property.
Work with a real estate brokerage that shows you the ropes
At CENTURY 21 Cedarcrest Realty, we work with many first-time home buyers at all income levels and with a variety of down payment savings. We understand what it takes—beyond showing homes in certain towns or within certain budgets—to get a real estate transaction from start to finish with as few hiccups as possible. One of the biggest roadblocks is qualifying for a mortgage, so we provide advice about mortgage options—including FHA loans; we also stress the importance of getting pre-approved for a mortgage in the tight market we operate in, which you can read about in this prior blog post. Contact us to get your home buying process started in Caldwell at (973) 228-1050 or Little Falls at (973) 364-1111.
How Much of a Down Payment Do I Really Need?
If you’re planning on purchasing a home, it’s important to know the facts regarding down payments. First-time buyers are often surprised to learn how much they need to put down, especially in today’s returning market. The good news is that there are many options available that may fit your current situation. Homeownership is still the American dream, and if you’re tired of paying someone else’s mortgage, buying a home may be right for you.
20% Down Payment Industry Benchmark
In the mortgage industry, 20% down is considered the benchmark down payment. A 20% down payment looks good on paper and indicates financial security. But, what if you don’t have this much cash to put down on a home? With the high cost of rent, you may not have been able to put much away, but are still able to make mortgage payments. Fortunately, 20% down is not a requirement, nor expected in many cases.
What Other Down Payments are Available?
For an FHA loan, which is backed by the Federal Housing Administration, the minimum down payment is 3.5% down. An FHA loan is a nice option for first-time buyers who don’t have a ton of cash, and the loan requirements are typically more flexible. The one thing to be aware of is that FHA loans carry a monthly mortgage insurance payment, which can add significant dollars onto your payment each month.
Another popular option for homebuyers is to put 5% down and still secure a conventional mortgage. And, with a conventional loan, you may be able to get rid of the private mortgage insurance after accumulating 20% equity in a minimum of 24 months.
What if You Don’t Have a Down Payment?
Some buyers simply have nothing to put down, but this doesn’t mean that purchasing a home is out of the question. The Department of Veterans Affairs does offer a program where the homebuyers don’t have to put anything down, but it’s available only to military veterans, and the home must pass a clear pest report.
A second option is through the Department of Agriculture, USDA. You don’t need to be a veteran for this loan, but it’s only available for homes that are designated rural by the USDA.
Your best option is to meet with a realtor or loan officer who can inform you of your loan options and what down payment will help you secure a home loan.
