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Your Home's Down Payment: It's Not As Much as You Think!

Posted at 04/03/2019 10:30 AM by Pat O'Connor
down payments denver

So you’re thinking about taking the plunge and buying a house? Do you need to get past the thinking stage and get to the action phase? Does the term “down payment” strike fear in your heart?

When people start the home buying process, many get hung up on the down payment part of the equation. The old adage of needing 20 percent of the purchase price is no longer the case. The “low down” on the down payment is just that. Many times, people can actually buy a house for just three to four percent.

Yes, you read that correctly!

Everyone’s financial situation is different so it’s important to meet with a lender to determine your options. Getting pre-approved for a loan is the first step and it usually takes less than an hour. There is no cost involved and it will make the home buying process move along much more smoothly. The worse case scenario is you may have to wait awhile before you can qualify for a loan. But, you’ll know where you stand financially and will know what you have to do in order to be approved for a loan.

With historic low interest rates and rent that continues to be high, it’s an excellent time to start looking for a place of your own.

Home Inventory Has Increased Since Last Year

In addition to the favorable mortgage rates, home inventory has increased over 47 percent from last year at this time according to Denver Metro Association of Realtors.  At this time in 2018, there were only 4,084 listings compared to the current 6,017. The median price of single family homes continue to hover in the $430,000 range while condos are around $297,000.

You’ll need to have a good understanding of your finances and savings plan when meeting with a lender. The qualification process will require documenting your income, any gifts that family or friends might provide, tax refunds, and also your expenses (credit cards, car loans, student loans, etc.).

One of the challenges facing millennials, and gen Xers for that matter, is making that first step from renting to actually owning a place of your own. With rents being so high, many elect to live at home with their parents or take on roommates in order to save enough money for the down payment. If you’ve just graduated from college, it’s not too early to start thinking about home ownership and saving money over the next couple of years to achieve that goal.

Home Ownership Across the U.S. is at a Four-Year High

According to the U.S. Census Bureau and an article in Housing Wire (Feb. 2019),  the homeownership rate in the U.S. rose in the fourth quarter of 2018 to 64.8%, which is a four-year high. It also continues a trend of the homeownership rate steadily increasing ever since that figure hit a nearly all-time low back in 2016. And, that increase is being driven by younger buyers.

In the Housing Wire article, CoreLogic Deputy Chief Economist Ralph McLaughlin, stated there’s even more good news hidden in the data that indicates much of the growth in homeownership seems to be coming from renters who are becoming homebuyers.

McLaughlin notes, homeownership, among buyers age 35 and under, rose from 36% to 36.5% in 2018, while homeownership for those ages 35-44 rose from 58.9% to 61.1% in the same time frame.

“Millennials, despite what many believe, are still very optimistic about homeownership,” offered Dave Cook, mortgage originator for Cherry Creek Mortgage. “The majority of that generation believe owning a home is a good financial decision and is part of the American dream. What often keeps millennials renting longer and out of the home buying process is the belief that you have to have 20 percent down to buy. I often see news coverage stating that people need 20 percent down and it causes many people to believe it and not investigate further.

“I believe if we can spread the word that you can buy with three percent down, we will be able to help many of these young folks much sooner. Once people graduate college, we tend to see it take them about one- to two years to save the down payment unless they are able to get a gift from their family to help out.”

Determine What Kind of Home, Down Payment is Best for You

In discussing home ownership, most people think of single family structures. However, in Denver’s hot market, there are other options, i.e. townhomes and condominiums.  Many young people prefer the latter, regardless if they are single, married or living together. Townhouses, duplexes, row houses and condominiums require less upkeep and are generally less expensive to purchase. Once you have a clear picture of your financial picture, you’ll want to decide what type of home best fits your lifestyle. From there, you can determine the best down payment. You may be eligible for some of these options:

Metro DPA Program is a special down payment assistance program for low and moderate-income individuals and families that seeks to bring the dream of home ownership within reach. Lacking the funds for a down payment is often a barrier to home ownership. The program provides down payment assistance as a zero-interest, forgivable 2nd mortgage. As you apply for a 30-year fixed rate mortgage, Metro DPA helps with down payment and closing cost assistance of up to 5% of your loan. Your lender will help you explore your specific income, debt, and credit factors. Unlike previous mortgage assistance programs you may have heard of, there is no requirement that you be a first-time buyer. Your income can not exceed $134,850.

The Colorado Housing and Finance Authority is another organization that provides help with down payments. Homebuyers using one of our first mortgage loan programs to finance their home purchase are eligible to use CHFA assistance options to help with downpayment and/or closing costs. Even if you contribute towards a down payment, you may still take advantage of some assistance. The down payment assistance grant will provide up to 3 percent of your first mortgage. Example: Get up to $6,000 on a $200,000 mortgage (30 year fixed loan) and no repayment is required. Special terms may apply.

In addition to the above programs for low to moderate income individuals, there are also more basic loans that your lender can discuss with you.

“Fannie Mae and Freddie Mac are conventional loans, and have down payment options for as little as 3 percent down for first time home buyers,” Cook explained. “FHA loans start out at 3 1/2 percent down. These loans are great for people with credit issues because the guidelines are much more forgiving.

“Jumbo loans have down payments as low as 10 percent down but ideally you will want to do 20 percent down on these loans to get the best interest rate. VA loans are amazing and can be done with no money down and no mortgage insurance. USDA loans also are another no money down loan and have great rates. However, the home must be in a qualifying USDA zone area.”

So make an appointment with a trusted lender and see where you stand. And don’t let the down payment get in your way.

(Editor’s note: This blog was originally published in September 2016. It has been revised and updated).

Posted by Pat O'Connor

Pat O’Connor has dual citizenship in both Wisconsin and Colorado, having been born and raised in Wisconsin Dells, but later adopted by the Centennial State. A graduate of the University of Colorado (B.S. Journalism, 1980), O’Connor began her career as a sportswriter at the Boulder Daily Camera under the tutelage of the venerable Dan Creedon. Her experience also includes stints in public relations at Aspen Highlands Ski Area, the Colorado Trial Lawyers and the Colorado Division of Wildlife. When she isn’t piecing together sentences, the self-proclaimed “Cheesehead” enjoys hanging out with her three kids and assortment of family pets, running, playing golf, hiking 14ers, horseback riding and skiing. As a mother to two (at one time three) competitive swimmers, her favorite fragrance is eau de chlorine. During football season, she can be found cheering for the Buffs on Saturdays and screaming when the Packers score on Sundays. She loves talking sports and giving recommendations on cheese curds.

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Topics: Home Buying