Buying a Home Without a 20% Deposit

Saving up thousands of dollars for down payment isn’t easy, particularly as home prices are increasing, but an article on Fox8.com has outlined a few ways you can get around this problem.

The national average listing price for a four-bedroom, two bath home is $302,632 according to figures from Coldwell Banker Real Estate. This would mean that potential homebuyers need to come up with a down payment of $60,526 in order to place a 20% deposit. If you don’t happen to have that much cash lying around then there are several other options, one of which is to apply for an FHA loan.

With an FHA loan the Federal Housing Administration will back mortgages that require as little as a 3.5% deposit. Although anyone can apply for this type of mortgage you do need a good credit rating and there are a few other issues to take into account. The lower deposit can incur more paperwork and will mean higher monthly payments are required since a greater amount of finance will be needed. In addition, borrowers will need to pay mortgage insurance on the loan as well as the principal and the interest, increasing monthly payments even more. However the good news is that these extra payments are lower than they were at the beginning of the year. At the start of 2015, mortgage insurance payments were reduced on some FHA loans by the government, increasing the number of people who see this as a viable alternative.

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The Department of Agriculture has a loan program designed to increase homeownership in less populated and more rural areas, but there are eligibility requirements which include property size and income. The Department of Veterans Affairs will guarantee loans for zero deposits for former and current service members. Some cities have assistance programs to help potential homebuyers, which are based on profession, the area in which you live and income qualification ratios and these are designed to help encourage people to buy.

If these choices aren’t an option then it may be worth asking a family member for a loan and this might be a popular option for a retiree who has plenty of money that is earning very little interest. Giving a family member a personal mortgage could offer them a steady stream of income. The article advises laying out the loan terms including interest rates and a payback schedule and putting everything into writing. In order for the loan to be legitimate the interest rate needs to be comparable with bank rates.

Another alternative is for the money to be gifted and currently the rate is $14,000 per person without triggering taxes. If this is an option then the giver has to provide a letter saying the money doesn’t need to be repaid.