One challenge first-time home buyers face is saving enough for a down payment. Often, young home buyers are saddled with tens of thousands of dollars in student-debt and are just beginning to get their careers off the ground. This makes it difficult to save enough for the traditional 20% down payment needed for a 15- or 30-year loan, especially in a market like Seattle where home prices are nearly triple the national average. The good news is that most lenders offer FHA loans that require as little as 3.5% down for a 30-year loan. Are you a veteran? VA loans through the US Department of Veteran Affairs are available with $0 down and no private mortgage insurance!
These programs make buying a home feasible for many, but there are pros and cons to a smaller down payment you should be aware of:
- If you don’t have enough saved for a large down payment, an FHA loan with 3.5% down allows you to start owning a home and begin building equity and stop paying your landlord’s mortgage every month
- If you live in an area where home prices are rising due to solid job and wage growth (like Seattle!) a small down payment allows you to get a foothold in the real estate market so that your wealth can grow with the rising tide of home prices in the area. If you are trying to save for that 20% down target, you may miss out on the appreciation gains of owning a home or have a hard time catching up with the rising prices
- A down payment of less than 20% will not qualify you for the lowest mortgage rates, meaning you’ll pay more you in interest each month and over the life of the loan
- If you put down less than 20%, you’ll have to pay Private Mortgage Insurance (PMI) which can be up to 1% of the loan amount each year. This will inflate your monthly payment by a few hundred dollars a month
- All of this amounts to a larger monthly payment with a greater percentage of that payment applying to interest and PMI, which means it will take longer to pay off your mortgage and you’ll be building equity at a slower rate
In either case, talk to your preferred lender and walk through these pros and cons and how they apply to your situation and your long-term goals. You should also inquire about the Seattle Downpayment Assistance Program and whether or not you qualify. Budget in the cost of mortgage insurance into the price of your home, along with other incidentals like student-loan payments, car payments, and credit card bills to make sure you can reliably make your payments while saving for a ‘rainy day fund’.
If you are a first time home buyer looking at real estate in Seattle, contact us at email@example.com or 503-679-8860. We can put you in touch with trusted lenders and guide you through the home-buying process from start to finish.
Please let us know if you are a first-time homebuyer interested in learning about Seattle's real estate market. Seattle has many wonderful neighborhoods that are perfect for first-time homebuyers and we are happy to help you buy your first home. We have a great track record for successful deals for both buyers and sellers in Capitol Hill, Beacon Hill, West Seattle, Ballard, Green Lake, and Greenwood.