Having Trouble Saving For A Down Payment? Your Guide To Buying A Home With Down Payment Assistance

The average American today, irrespective of race, has a host of questions pertaining to homeownership. Most don’t even know where to start when it comes to purchasing a home and have questions like how much of a down payment do I need to put down? How much house can I afford? Etc.

As a result, many individuals—especially within the Black community—believe their dream of homeownership is far less achievable than it really is. Despite there being over 2,300 down payment assistance programs to provide financial support, the average future homebuyer still believes they must save a down payment that is 20% of the sales price in order to get into a home. In fact, according to a study by Fannie Mae, as many as 73% of people do not know their options for a low-down-payment mortgage.

One of our goals at LEGACY Home Loans is to demystify the home buying process for our customers. We do our best to make the mortgage loan process very simple. We believe that by educating Blacks on homeownership, we can help this community close the racial wealth and homeownership gaps.

Down payment assistance and FHA loan programs are great options for the Black community, who have faced a long history of predatory lending—which negatively affects their FICO score—and being denied loans. Blacks also earn less on the dollar than Whites, which causes them to have less money to put towards saving for a home. In fact, data from The Federal Reserves shows that the average person in 2019 had $2,000 in their checking account. This number was even less when race was considered. The median checking account balance for Whites was $2,500, but only $700 for Blacks. Similarly, while the average savings for Whites is $33,879, the average Black person in America only has $10,479 saved. With a low down payment loan, this money could potentially be used for a 3.5% down payment on a home that costs approximately ~$285,000 (other factors apply). Those who were unaware of their financial assistance options would not even know that homeownership was within reach!

It all starts with education.

To get started, let’s first cover what a down payment actually is.

A down payment is essentially the amount of cash you are able to put towards your home purchase. The down payment determines how much instant equity you have in your home. The remaining balance of the home price will be lent to you by your mortgage lender. The more money you are able to pay towards your home, the less money you will have to borrow from a lender. The less money you borrow, the smaller your monthly mortgage payment will be (depending on your credit score and interest rate).

How much down payment is really needed to purchase a home?

The amount of money that you are required to put down is entirely dependent upon the type of loan you qualify for.

So where did the 20% number come from?

Some mortgage lenders suggest putting a down payment of 20% towards your home in order to help the borrower lower their monthly mortgage payment, avoid higher interest rates and to prevent them from having to pay extra money for private mortgage insurance (PMI).

How do I qualify for a down payment assistance program?

While shopping around for mortgage lenders, simply ask what down payment assistance programs you qualify for. These programs are typically limited to first-time home buyers and have a minimum FICO credit score requirement, along with income limits, but there are programs that do exist for those who are not first-time homebuyers. However, with some down payment assistance programs, borrowers can obtain up to 100% financing and will just need to cover closing costs. Those who live in a rural community may be eligible for a USDA Loan with $0 money down and no PMI. However, be sure to hire a reputable real estate agent who may be able to negotiate that the closing costs are covered by the seller.

Those who do not meet all of the loan requirements for a down payment assistance program can also look into qualifying for a low-down-payment loan— the most popular of which is the government-backed FHA loan. Low down payment loans are great for those with less than perfect credit or who don’t necessarily have 20% to put down on a home. Instead of a 20% down payment, this program allows borrowers to put down 3.5% of the purchase price. Another fantastic perk of FHA loans is that they typically have lower interest rates than conventional mortgage loans.

But what about borrowers with poor credit? Is it possible to purchase a home with a low credit score? Of course! Those with credit scores as low as 500 can still qualify for an FHA loan. The only caveat is that they must put down a 10% down payment.

While these loan programs are not exclusively for the Black community, these options significantly widen the door to homeownership and help to even the playing field between Whites and Blacks. We hope that by educating our community on the options that are available to them, we can do our part to help decrease the wage and homeownership gap and create more Black homeowners.

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