August 6th, 2021 at 11:00 am

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Buying your first home is such a high point in your life–No more dealing with landlords and prohibitive leases; No more worrying about putting nails in your walls and voiding your security deposit. It’s your property, your rules, which also brings plenty of responsibilities. It also brings a lot of questions, such as, “do first time home buyers need a down payment?”

Before you get to that point, you have to actually pay for the property, which usually means financing of some kind. Financing and mortgages usually mean a down payment, which can be a tricky concept for anyone, but it can be even more confusing for a first-time home buyer. How much do first-time home buyers have to put down? Do they even need a down payment? Read on to learn more.

What is a down payment?

For most people, large purchases, particularly cars, real estate, and homes, require some form of taking out a loan. Depending on the terms of the loan, you may be required to pay a certain amount of money up front in order to make the purchase. That upfront payment is the down payment, and it is usually present as a percentage of the total price. For example, a 10 percent down payment on a $50,000 purchase would be $5,000.

The down payment goes toward the full purchase and, for a home mortgage, it’s also your initial ownership stake in the home. Even without making the full purchase, the down payment represents your ownership, but it can also affect your interest rates and other terms of the monthly payment of the mortgage.

Minimum down payments

Most mortgages necessitate a down payment. A 20% down payment of the purchase price generally allows for a better mortgage interest rate and increases your chances of actually getting approved for the mortgage.

However, depending on the lender, program, or type of mortgage, the minimum requirements can actually be lower.

Even with these programs, your down payment can depend on your credit score and household income, but most lenders and home assistance programs will show favor to first-time home buyers.

Wondering how to get a first-time home buyer’s loan? Read on to learn everything there is to know about first-time home buyer’s loans!

Down payment strategies for first-time home buyers

Most lenders do want to help you achieve your dream of homeownership, especially as a first-time buyer. That often means giving you fairer terms and lower down payments, which removes the barrier to entry. As a first-time home buyer, you have a wide range of options and strategies for a low down payment.

Government-backed mortgages

As mentioned, VA loans and USDA loans require no down payment, and loans from the Federal Housing Administration offer 3.5%down payments, which is considerably less than the 20% average down payment.

However, remember that these loans have their own qualifications and eligibility requirements. VA, USDA, and FHA loans are sponsored directly by the federal government. Essentially, the government promises to repay the lender should the borrower fail to make payments. This reduces the risk for the participating lender and allows for more favorable terms and a zero-down payment.

Both USDA and FHA loans require a mortgage insurance premium. Mortgage insurance works similar to the funding fee in that it protects lenders should you default on the loan. The exact amount of mortgage insurance that you must pay will vary based on your credit score and income. You will generally have to make an upfront payment requirement that can be rolled into the total loan amount, followed by monthly payments. Due to the reduced down payment, you will likely have to pay this mortgage insurance for the entire lifetime of the loan.

Conventional loans

Aside from mortgages that are guaranteed by the government, first-time homebuyers can also look toward conventional lenders. Fannie Mae and Freddie Mac are two of the most prominent lending enterprises in the country, and both have similar mortgage programs.

Fannie Mae’s HomeReady program offers mortgages with just a 3% down payment. This program does have income requirements, but if the home is in a designated low-income neighborhood or if it is your first time buying a home, those restrictions are rendered void. Borrowers must also have a minimum credit score of at least 620 with a debt-to-income ratio of 50%. These can seem like fairly strict requirements, but Fannie Mae does allow parents to be considered as co-borrowers even if they don’t reside in the home. Furthermore, the HomeReady program does not require mortgage insurance.

Freddie Mac’s Home Possible program is similar to the HomeReady program. It offers 3% down payments on mortgages for low- to moderate-income borrowers. At least one borrower must be a first-time buyer, but there are no minimum income requirements or geographic restrictions.

State and local assistance

States and some local municipalities offer their own mortgage-assistance programs for first-time home buyers. These payment-assistance programs are implemented by state governments, nonprofit organizations, foundations, and certain employers. They work by either providing grants or zero-interest loans that are forgivable and/or deferrable. These are potentially the best way to deal with down payments as a first-time home buyer.

In California, first-time buyers can choose between two programs: the MyHome Assistance Program and the Zero Interest Program. Both are offered by the California Housing Finance Agency (CalHFA). The MyHome Assistance Program is a deferred-payment subordinate loan that can be used for closing costs or a down payment when taking out a CalHFA mortgage. The first-time home buyer program is specifically for people with low to moderate income. These loans are limited to 3.5% of the appraised value or home’s purchase value (whichever is lower) and is capped at $10,000. Subordinate means that you don’t have to pay off the amount until you pay off the mortgage, refinance your home, or sell your home. You can also combine this program with other grants and assistance programs.

While it doesn’t specifically apply to down payments, CalHFA’s Zero Interest Program can still be helpful in the home-buying process. The Zero Interest Program offers up to 3% of the total mortgage amount in a second loan. The second loan is interest-free and goes toward paying for closing costs. Payments on the loan are deferred as long as you own and live in the house, but selling, refinancing, transferring the title, or defaulting on the mortgage will force you to pay the loan back in full.

These programs do come with requirements. You must be a first-time home buyer, which in California means you have not owned or occupied a home in the past three years. The property must be located in California, and it cannot be larger than 5 acres. You must be a U.S. citizen, permanent resident, or qualified alien, and you must have a credit score of at least 660. You have to meet all the income and sales price requirements set by the mortgage insurer and lender. Additionally, you have to take an approved home-buyer education course and obtain a certificate of completion.

The argument for a larger down payment

Depending on your financial well-being and your status as a first-time home buyer, putting more money down may not be an option, but if it’s in the cards, it’s worth considering. Obviously, a low down payment makes the process of buying a home much faster, but paying a larger down payment comes with its perks.

A large down payment typically means:

How much should you put down on your first house?

There are a lot of factors to put into consideration. A large down payment can be a huge boon to you in the long-term with lower monthly bills, but that may also mean less cash when you move in. Paying a low down payment speeds up the home-buying process, but you may end up paying more money down the line in mortgage insurance premiums and other fees.

Make sure you set a budget that allows for a reasonable down payment while leaving you enough cash on hand to pay for any maintenance or emergencies. Avoid dumping all of your savings into a down payment. Remember, you still need cash even after you buy your house for furniture, décor, and utilities.

Do first-time home buyers need a down payment?

Yes and no. It depends on the programs you take advantage of and the lenders you work with. If you need assistance, consider consulting with Southern California real estate agents at Berkshire Hathaway HomeServices California Properties. Our team of California real estate agents has the experience and knowledge to guide you through the process.

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