You want to buy a home? Have you looked at prices lately!? Do you know how much you need for a down payment!?! You’ve got to be crazy!!! There is no way you can come up with THAT MUCH money right now. I mean, come on. Don’t you need like 20% down for a house? That’s got to be like $50,000-$60,000 with where homes are priced. Buying a home just is NOT an option for you right now. Right?
WRONG. Well, maybe it isn’t the right time for you to be buying a home right now. But the premises above are probably not going to be what holds you back. Let’s talk about why.
The notion that a down payment of 20% of the purchase price is required is very antiquated. It’s still required for most loans for commercial or investment properties. But for your own owner-occupied mortgage, it’s just not the way it is.
Here is the listing of the minimum down payments for the most commonly used mortgage programs:
Conventional Mortgage – 5% down (using SDHDA First-Time Buyer loan cuts this to 3%)
FHA Mortgage – 3.5% down
Rural Development Mortgage – 0% down (available everywhere in SD except Sioux Falls and Rapid City)
VA Mortgage – 0% down
Now there are certainly benefits to putting more than the minimum down (like paying less interest, among other reasons), but these are the required minimums. As you can see, none of these require anywhere near 20% down payment.
And now, the really good news.
Aside from low down payment options, there are some pretty great down payment assistance programs out there. It’s probably one of the most common questions we get from people looking to buy their first home.
Do note that most of the programs out there do have income guidelines, and you are still going to have to qualify for the loan through a bank. But while you are applying for said mortgage, be sure to have the conversation with your lender about programs you may qualify for. For example, the SDHDA and Sioux Falls Community Development programs consider you a first-time buyer as long as you haven’t owned a home you lived in in the last 3 years. That’s it.
Here are the big ones in our service area of Eastern South Dakota:
SDHDA Fixed Plus – This is a part of South Dakota Housing’s First-Time Buyer program. The program in and of itself is a GREAT program, even compared to other states. With the Fixed Plus option, you are going to pay about a half percent higher interest rate, but the state GIFTS you 3% of the loan amount to use towards your down payment. The higher interest essentially pays them back over time for the gift to you.
Because of the higher interest rate, there is a break even point in time where the higher interest rate will end up costing you more than you got in the gift. That is usually quite a few years down the road for most buyers (like possibly even longer than most will stay in their first homes). Your lender can help you figure out where that break even point is and if it makes sense for you. Then again, the higher cost over time may be worth it for you if it gets you into your own home sooner. And then there is the equity that you build from day one because you are paying your own mortgage, not your landlord’s……
You can find more information and the list of participating South Dakota Housing lenders here.
Home$tart Program – Some background first to explain this. Most lenders don’t actually have the money they lend to you. They get it from regional wholesale banks like the Federal Home Loan Bank of Des Moines. The FHLB of Des Moines also has their Home$tart program that offers up to $7,500 dollars to qualifying borrowers. The money can be used for down payment, closing costs and prepaids, and even significant home repairs after purchase.
While it is a grant, they will actually put a second lien (common practice) against your home for the amount of what is actually a loan. But 20% of that loan is forgiven each year you live there. Stay for at least 5 years, and the entire loan is forgiven, the lien is released, and you just got some free money. You will actually go through your local lender to apply for the grant, but only certain lenders participate in the program and you can find that list here. Just scroll down to the South Dakota section.
GROW SD – GROW SD is a program that started in northeast South Dakota, but has since expanded their service area. The have a few different programs available that include straight down payment assistance similar to the Home$tart program and a matched savings program where they match each dollar you put into an account specifically for a down payment.
We don’t see as many of these as they don’t have the same level of funds as South Dakota Housing or the Federal Home Loan Bank, but it is a good program for those who use it. You can find their website here or talk to your lender to see if they participate.
Sioux Falls Community Development – A program specific to Sioux Falls, the Community Development Purchase Assistance program offers up to $5,000 towards down payment and closing costs. Rather than a grant, this is a deferred no-interest loan. This means that the loan will not accrue any interest no matter how long you have it and isn’t payable until you either sell the home or cease to live there as your primary residence.
One qualification is that you must buy within their designated program area, but covers a pretty significant area of the city. You can find the map, qualifications, and more information on their website. Community Development also has special loan programs to assist with major repairs and furnace replacement.
Again, while you can get into a new home for VERY little money down, Make sure that is the right choice for you. While you may not need much cash for the down payment, there are still all of the utilities, repairs, maintenance, the mower, shovel or snow blower…. This list goes on. Evaluate the bigger picture before blindly jumping into one of these assistance programs.
One requirement of many of these programs is pre-purchase education. Even if you don’t need the HERO certificate to qualify, CFR’s Homebuyer Express classes are a great place to start for first-time buyers. The free class covers all kinds of subjects from budgeting to loans and the lending process, predatory lending, the buying process, inspections, appraisal, closing, and so much more. You can find out more about the Homebuyer Express classes at this link or call us at 605-330-2700.
The most common single piece of feedback we get is “I wish we would have taken this class sooner!” Don’t set yourself up to have that same regret.
written by Breck Miller
images courtesy freedigitalphotos.net