This post is written by me in partnership with Unison HomeBuyer. Opinions are my own.
I know that saving up for a down payment can feel daunting. A few years ago when my fiance and I were considering buying a small apartment in Harlem, we were looking at prices upwards of $800,000!
At the time, we were only making around $80,000 combined. That’s right. We would have needed DOUBLE our COMBINED annual income to come up with the 20% down payment.
Ultimately, we decided that home ownership wasn’t for us just yet, but along the way we learned A LOT about creative ways to finance a home when a 20% down payment feels too far out of reach.
According to a survey by Apartment List, this is a common situation: 80% of millennial renters want to buy a home, but most say they can’t afford to.
If you’re one of those on the home hunt and you can’t figure out how to come up with the cash you need to put down, here are four ways to make it happen…
1. Borrow Money from a Family Member
The idea of asking a loved one for a loan might feel uncomfortable, but it could also be one of the most cost effective ways of getting the cash you need for your down payment.
If a family member is in a position to lend you the money, you can likely negotiate terms with them that are far more beneficial to you than the terms you might get from a traditional lender.
The average rate for a 30-year fixed rate mortgage has been hovering around 5 percent the last few months. By taking out a loan from a family member, you can save money by negotiating a lower rate – saving you money over the life of the loan while helping your family member earn interest on their money in the meantime.
To help avoid the potential awkwardness of asking your loved one for a loan, come at the conversation like you would any business proposition – stating exactly how much you need to borrow, how you will repay the loan, on what schedule and at what interest rate. If your family member is receptive to your proposition, you can draw up a contract with the terms of your agreement.
This kind of clarity can help make sure that financial assistance doesn’t turn into financial or emotional resentment, and help keep you accountable to your agreement.
2. Partner With an Co-Investment Program
Anyone who lives in a high cost of living area knows the seemingly impossible struggle of trying to save up for a starter home while simultaneously paying sky high rent. To provide a solution for that, some companies have come up with unconventional ways of making your dream home purchase possible…without leaving you with a giant monthly mortgage
The Unison HomeBuyer program is a great example. Unison’s HomeBuyer program provides you with at least half your down payment by co-investing in your home.
In other words, rather than giving you a loan, Unison invests in your home along with you. So instead of the traditional debt-based model in which you pay back your loan with interest over time, Union gets a share of the future change in the home’s price – typically 35% of any gain (or loss) in the home’s price at the time it’s sold.
The great thing about this alternative is that Unison only makes a profit if you also make a profit. If you sell at a loss, they share in the loss. Unison also doesn’t own any portion of your home while you live there, so you get to maintain control over all the aspects of the home. For example, if you make home improvements, Unison ensures that you keep any equity related to those upgrades.
While some people might not want to lose out on the potential appreciation of their home in the future, the Unison solution can be a great way to save money on PMI, which stands for private mortgage insurance. That’s the extra insurance you have to pay when you put less than 20% down on a home, which, in a high cost of living area, could amount to thousands of extra dollars each year.
Programs like the Unison HomeBuyer Program can also be helpful when you don’t want to want to deplete your entire savings account balance for the sake of becoming a homeowner. Like when you have other big expenses coming up, like furnishing your new home, or a wedding or a new baby.
Before opting into this kind of program or any other, it’s important to understand all the terms of such an agreement. For example, Unison charges a transaction fee of 2.5% of the amount invested to cover processing costs. And they also only share losses with homeowners if the home is sold at least 3 years after purchase.
So take some time to think through your particular circumstances and assess whether a homeownership investment program like Unison could be a better fit for you. Unison’s program specialists can help answer any questions you might have and walk you through their program.
3. Take Advantage of Any Applicable Homebuyer Programs
If you’re a first time home buyer or if you have a certain profession or you live in a certain area, you may qualify for homebuyer programs that can help you during the purchase process.
For example, Federal mortgage lenders Fannie Mae and Freddie Mac work with local lenders to offer mortgage options that benefit low- and moderate-income families. These lenders offer competitive interest rates with down payments as low as 3 percent of the purchase price.
The US Department of Housing and Urban development also offers alternatives like FHA loans, which may allow you to qualify for a mortgage with a lower credit score and a down payment as little as 3.5 percent.
Before buying a home, be sure to also check your state and city’s website for information on housing grants and programs available in your area. There are also programs specifically for veterans, Native Americans, people buying in certain areas and people working in certain professions, like law enforcement and early education.
As you search for programs, be sure that whatever you find is being officially offered through your state, city or a reputable bank. There are plenty of scammers out there seeking to lure buyers into scam and expensive mortgages, so be sure to do your due diligence.
As with all of these options, the key here is to take some time to research what programs might be available to you, then assess whether the benefits outweigh any potential drawbacks for your particular circumstances.
4. Suck it up and pay the PMI
While it’s never fun to pay extra money every month, you might decide you just want to put down whatever you’re comfortable with and pay the PMI (the Private Mortgage Insurance that protects your lender if you default on your mortgage).
So here’s the deal with PMI. It’s required when you put down less than 20% of your home’s purchase price. On average, it costs between 0.5% and 1% of your entire loan amount annually. For example, if you’re buying a home with a $600,000 mortgage, you can expect to pay an additional $250-500 per month in PMI.
So when might you consider putting down less than 20% and paying the PMI? Maybe if you live in a market that is quickly appreciating (like a big city). In that case, you might want to pull the trigger and buy sooner, so you can profit off of the appreciation you’d otherwise miss by waiting until you can afford a larger down payment.
The downside, in addition to added cost, is that putting a big chunk of your savings into a single investment can leave you cash poor and vulnerable if the value of your home drops. So be sure to consider the other alternatives before making that choice.
While saving up a 20 percent down payment has long been a benchmark for when you can afford to buy a home, the reality is, there are plenty of alternatives that can help you buy a home with as little as a few percentage points down.
And if you’re in a hot and growing real estate market with a stable income and a bit of savings, it might make sense to jump in while you can, rather than wait until you’re priced out of the market.
Just be sure to assess all of your options and do your due diligence before settling on any option. And remember, that your home is one of the biggest purchases you’ll ever make. So it’s worth spending a little extra time to do your research and talk through what decision is ultimately best for you!
This page titled 4 Ways to Buy a Home When You Don’t Have Enough of a Down Payment and more fantastic content can be found at this website. It was originally published on 2019-05-08 11:57:32.