If you're looking to buy a house with little-to-no cash, your options may be limited. Here's what you need to know if you're thinking about seeking down payment assistance to get your foot in the door.
How Down Payment Assistance Programs Work
Down-payment assistance can be sponsored by a local, state or government entity or entity grant. They grant a set amount to use on down payment or closing costs.
In recent years, down-payment assistance programs, once a popular option for homebuyers, have become scarce. Some still exist if you know where to look.but they have strict guidelines regarding who can apply and qualify.
If you do meet the criteria and are approved, the down payment comes in the form of a gift or a loan through the entity providing the funds.
That sounds simple, but given the current economic climate, if you are trying to buy a home using down payment assistance, it could prove challenging and leave your feeling financially stressed. Here's why.
- Low unemployment plus strong job growth means rising home prices.
- People buy homes when they feel financially secure.
As long as these factors remain, competition in the housing market will be strong. In Sonoma County, California, for instance, there is little inventory while demand is driving housing prices up. Higher prices mean you'll need to secure a larger down payment in order to buy a home.
Some buyers in the marketplace are working with 5% down or 3.5% down or more and in some cases they're using all cash. Of course, offers with a down payment look stronger on paper and are attractive to a seller with financial goals of his own.
To maximize your buying potential, try to bolster your down payment before applying for a mortgage. Both Conventional and Federal Housing Administration loans allow for the use of gift funds. Other options include the following:
- checking and/or savings accounts
- certificate of deposit
- money market accounts
- cash-value life insurance
- selling personal property
- security deposit refund
- tax refund
Be sure to do your research to determine which option is best. Raiding your retirement savings could bring on costly tax penalties, while draining your checking account could leave you scrambling to make ends meet, even leading to debt.
If you've exhausted all your efforts and simply do not have the cash, that is OK. It's far better to be in a position to buy a home through budgeting and planning than to buy a home with down payment assistance and not have the cash to fix something down the line. After all, home repairs can add up, and the last thing you want is to overspend by living beyond your means.
And, as you prepare to buy a home, make sure to check your credit, since a good credit score will help you qualify for better terms and rates. You can see where you currently stand by viewing your two credit scores, updated each month, for free on Credit.com.
If your credit is looking lackluster, you can try to improve your score by disputing errors on your credit report, paying down high credit card balances and limiting new credit inquiries.
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