Busting the myth of 20% down
Down payment assistance programs make home buying easier
The home-buying process can involve some big financial barriers for would-be borrowers, and coming up with enough cash for the down payment is chief among them. For many, it’s a hurdle that’s simply too high to overcome.
Or so they think.
Unfortunately, there’s a good deal of misperception around the home purchase, especially among Millennials and first-time homebuyers. One persistent myth is that a 20% down payment is required.1
In fact, roughly 80% of first-time homebuyers make down payments that are less than this.2
The 20% figure simply determines whether private mortgage insurance (PMI) is necessary. Most lenders don’t require PMI when a homebuyer puts down 20% or more on a conventional loan, whereas a down payment below this percentage means PMI becomes part of the equation. (Because mortgage insurance premiums are a standard part of FHA and USDA home loans, borrowers who can put down 20% or more have little reason to explore these government options.)
For qualified borrowers who need a little help on the front end, there are dozens of down payment assistance programs (DPAs) to consider. Many of them are tailored for first-time homebuyers, providing them a financial boost—thus a psychological one as well—when making life’s biggest purchase.
DPAs can be offered by individual lenders, municipalities, finance agencies, and local and state governments, among other institutions. They come in the form of grants, tax breaks and low- or zero-interest loans.
Grant—Money that does not need to be paid back, though it comes with a few restrictions. For instance, homebuyers are often required to own and occupy the home for a given time period in order to benefit from this DPA.
Example: Give 2 You DPA*, Guaranteed Rate
This program is available nationwide to anyone, anywhere in the United States. With Give 2 You, qualified homebuyers put down 3% (the minimum down payment required for a conventional home loan), then Guaranteed Rate throws in a grant for up to 2% of the purchase price. And unlike many other DPAs, the funds do not have to be repaid if the borrower moves or refinances. For homebuyers with a credit score of 680 or higher, Give 2 You provides a grant that can be used to apply to your closing costs, buy down your interest rate or get closer to eliminating your private mortgage insurance.
Tax break—A mortgage credit certificate (MCC) that reduces the amount of federal taxes homebuyers have to pay. The freed up funds can then be used toward the down payment.
Example: TaxSmart Mortgage Credit Certificate Program, City of Chicago
With this DPA, borrowers will receive an MCC that reduces their taxes by an amount that’s equal to 25% of the mortgage interest paid. The MCC can be claimed annually as long as a few conditions are met:
- The borrower lives in the home and it’s the primary residence.
- The home is not used as an investment or vacation property.
- The borrower doesn’t use more than 15% of the home’s area for business.
A $375 application fee is part of the deal, $225 of which is due at closing, and there are restrictions to the borrower’s annual income as well as the home’s purchase price. TaxSmart MCCs are issued on a first-come, first-served basis, and first-time homebuyers must undergo pre-purchase counseling to be eligible.
Loan—Second mortgages that carry low interest rates or none at all. Payments can often be deferred, and in some programs the loan is completely forgiven over time.
Example: 1st Home Illinois, Illinois Housing Development Authority (IHDA)
Available only to first-time homebuyers in select counties, 1st Home Illinois offers $7,500 toward the down payment in the form of a 30-year fixed rate mortgage. As long as the borrower lives in the property and it’s the primary residence, the loan is forgiven after five years. The program has annual income and purchase price restrictions, and is limited to existing one- and two-unit residential properties. To be eligible, the borrower is required to contribute $1,000 or 1% of the purchase price, whichever is greater, and must receive homeownership counseling.
There are roughly 2,300 available DPAs across the country to help hopeful borrowers become new homeowners.3 First-time homebuyers would be wise to research the various lenders, housing authorities and government agencies in their area to help them overcome a daunting down payment.
1Newsroom.Genworth.com, “First-Time Homebuyers Deterred from Purchasing By Down Payment Misperceptions”
2EconomistsOutlook.blogs.Realtor.org, “Eighty Percent of First-time Homebuyers Put Down Less than 20 Percent Down payment (Based on December 2016–February 2017 Closed Sales)”
3RealityTrac.com, “87 Percent of U.S. Homes Qualify for Down Payment Help According to RealtyTrac and Down Payment Resource Analysis”
Give 2 You: *It is important for you to know that the smaller your down payment percentage, typically, the higher your interest rate. Down payment assistance cannot exceed 2% of the purchase price. Minimum credit score and debt-to-income (DTI) requirements, annual income limits and purchase price limits apply. Not all applicants will be approved. Receipt of application does not represent an approval for financing or interest rate guarantee.
Example: Monthly principal and interest (P&I) payment of $1,193, based on a purchase price of $250,000, down payment of 3% (1% provided by borrower and 2% provided by Guaranteed Rate), 30 year fixed rate mortgage (360 monthly payments) and rate of 4.250%/5.028% APR (annual percentage rate). Advertised rates and APR effective as of 06/05/17 and are subject to change. Assumes a first lien position, 720 FICO score, 55 day rate lock, based on a single family home in Illinois. Subject to underwriting guidelines and applicant’s credit profile. Sample payment does not include taxes, insurance or assessments. Actual payment obligation will be greater. Applicant’s interest rate will depend upon the specific characteristics of applicant’s loan transaction, credit profile and other criteria. Contact Guaranteed Rate for more information and up to date rates.
Tax Smart: Contact your local Loan Officer today to see if you are in a targeted area.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of applicant’s application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Guaranteed Rate for current rates and visit www.guaranteedrate.com/restrictions for more information.
IHDA: Made possible by the Illinois Housing Development Authority (IHDA). $7,500 in down payment assistance is forgiven over 5 years at a rate of 1/60 per month. Illinois only with limited availability based on county. Please contact Guaranteed Rate for full details. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Guaranteed Rate for current rates and visit www.guaranteedrate.com/restrictions for more information.