Like Generation X and the Baby Boomers, the Millennial generation has dreams of becoming homeowners, saying goodbye to rental payments and hello to space that they truly can call their own. While many Millennials may feel finding the perfect house is the biggest part of buying a first home, there are other, maybe less fun, parts of the process that need to be considered.
Before beginning the process of buying a home it’s essential to fully understand the different aspects regarding the home down payment.
Defining a Home Down Payment
A home down payment simply is part of the money the buyer gives to the home seller. Usually this money comes directly from the buyer, while the remainder of the purchase price owed to the seller comes from the mortgage. When buying a home, the down payment amount is expressed as a percentage. For example, a 10 percent down payment on a $350,000 home would be $35,000 from the buyer.
According to Bankrate, the down payment is lost if the buyer can’t make the house payments (mortgage payments) and the property ends up in foreclosure. Bankrate states, “This gives you an incentive to make your mortgage payments. That’s why the lender requires a down payment.”
Down Payments and Mortgage Insurance
On average, when a homebuyer makes a down payment that’s less than 20 percent, the buyer must purchase mortgage insurance. Mortgage insurance is designed to protect the lender, not the buyer. It’s designed to reduce the risk for the lender when making a loan, allowing a first-time buyer with less than perfect credit to secure a mortgage.
Millennials may qualify for PMI or private mortgage insurance, which features premiums that must be paid monthly or an option of an upfront premium that’s paid when the loan begins. FHA insurance is mortgage insurance paid to the federal government. This type has an upfront premium payment plus monthly payments.
Mortgage insurance is money that must be budgeted alongside your monthly mortgage payments to the lender.
Consider Loan Down Payment Programs
CNBC reports that while 80 percent of Millennials want to purchase a home, “very few are in a good position to buy, largely because they have nothing saved.”
For Millennials who haven’t been able to save a 20 or even 10 percent home down payment due to student loans, lower income jobs, and other factors, there may be an option of a loan down payment program. Some Millennials may qualify for down payment assistance programs through both local and state agencies, and look to see if they might qualify for an FHA loan. In addition, the National Homebuyers Fund (NHF) offers multi-state Down Payment Assistance (DPA) programs with non-repayable grants. According to the NHF this type of down payment assistance can make home ownership possible and offers the following:
- Down payment and/or closing cost assistance grant, up to 5 percent of the loan amount
- DPA doesn’t have to be repaid
- Available with affordable interest rates and variety of grant level
How Median Home Prices Have an Effect
Often when first-time Millennial homebuyers begin thinking about buying a house, they underestimate just how pricey the real estate market has become, especially in certain areas of the country. Real estate professionals continually see a gap between expectation and reality with this generation of buyers. For Millennials considering a real estate purchase, it’s essential to learn the median home prices of the area. If the median home price is $430,000, then a 20 percent down payment would be $86,000.
It’s possible for Milliennials to find a great home and to stay on budget, especially if there’s a full understanding of all the elements including the factors about the down payment.
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- What Millennials Should Know About the Home Down Payment - September 18, 2017