Trying to figure out how to swing a down payment on your first home? If you’re a first-time homebuyer along the Front Range of Colorado, you’ve got more down payment options than you may realize. And with median home prices rising and affordability decreasing along the Front Range, choosing the best down payment option for your budget and lifestyle means making homeownership a comfortable fit. In this guide, we’ll help you understand:
- What is a down payment?
- Three down payment options to consider
- Five monetary sources to fund a down payment
- Six programs to assist Colorado homebuyers
What is a down payment?
A down payment is a lump sum paid upfront during the closing process on a home that reduces the amount of money borrowed. The purpose of a down payment is to demonstrate personal involvement and responsibility in the purchase of a home. It also protects the lender against possible losses in the event of default.
Your down payment affects your loan-to-value ratio (LTV), which is the difference between the amount borrowed and the sales price. For example, if the sales price is $100,000 and the loan amount is $80,000, then LTV is 80% with a 20% down payment.
Use this handy mortgage calculator to better understand the numbers involved with securing a home loan.
Three down payment options to consider
As you evaluate which down payment option is best for you, think of your entire financial picture. Spending more upfront isn’t the best idea if you have other expenses to tend to, such as fixer-upper home remodeling projects or student loan debt. Consider working with a CFS* Wealth Management Advisor at Elevations to create a roadmap for your overall financial goals. And, ask to discuss these three down payment options when you talk to your Mortgage Loan Officer.
3% (or more) down payment
Consider this option if you have limited funds for a down payment. Your down payment can start at 3% of the selling price of the home, and all of these funds can be gifted from a relative. With down payments under 20%, the borrower pays private mortgage insurance (PMI) to insure the lender against losses in the event of foreclosure. The amount of coverage and premium are based on loan-to-value (LTV) and your credit score, with a maximum LTV of 97%. Payment options include a one-time mortgage insurance premium or smaller monthly payments escrowed into your monthly mortgage payment.
We’ve seen that the appreciation of homes in our area often outpace PMI. If you’re paying PMI monthly, you can request an appraisal after two years of payments. If the value of your home has gone up and the LTV is now 80%, PMI may be removed (this is lender/investor dependent).
How much would PMI cost? For every $100,000 in loan amount:
- With 3% down, PMI would be approximately $690/year
- With 5% down, $400/year
- With 10% down, $290/year
- With 15% down, $190/year
This option is comprised of 80% first mortgage, 10% home equity line of credit (HELOC) (also called a second mortgage) and 10% down payment. While the advantages of an 80-10-10 include a lower down payment at closing and no PMI, HELOCs often have adjustable rates, so your payment may increase over time. HELOCs can also have a balloon payment (a large sum due at the end of the loan period) if you make interest-only payments.
20% down payment
Known as the standard down payment, a 20% down payment gives the buyer instant equity in his or her home, greater buying power and lower monthly payments. Plus, it means you don’t need to purchase PMI, saving you money each month.
Five monetary sources to fund a down payment
As you begin to think about what type of down payment is best for your situation, consider where the funds will come from. Not everyone has a lump sum waiting in their savings account for the down payment on a home, and that’s perfectly fine! Here are five places most homeowners source their down payment from.
1. Seasoned funds
The money you use for a down payment must be seasoned and in a verifiable, liquid account. To be seasoned, the money must have been acquired more than two months prior to the mortgage application. If it’s not seasoned, to the acquisition the funds need to be fully documented for the underwriter. Liquid accounts include checking, savings and money market accounts.
2. Gift funds
Money given from a relative toward a down payment must be gifted, rather than borrowed. Documentation is required with a Gift Letter stating that repayment is not expected. Verification of the transfer of money is also required.
3. Secured loans
Loans taken against a secured asset (like a retirement account, car or other real estate asset) require documentation and verification of the deposit into a liquid account. Note that these loan payments will be included in your debt-to-income ratio when obtaining your mortgage loan.
4. Liquidation of assets
The sale of investment accounts like stocks, bonds and retirement accounts requires documentation, as does the sale of personal property.
5. Seasoned cash
Cash isn’t an acceptable source of funds for a down payment because it can’t be documented. If you have cash on hand, deposit the funds in a liquid account (see #1 above) and get them seasoned. The same rule of thumb applies to precious metals, collectibles, etc.
Six programs to assist Colorado homebuyers
Thankfully, you don’t have to go this journey alone. There are organizations locally and nationally to help you navigate the homebuying process and secure a down payment. Here are six options to consider.
Veterans Affairs (VA)
To qualify for a VA loan, you must be an eligible service member, veteran or surviving spouse. This type of loan allows for up to 100% LTV, and in place of mortgage insurance requirements, VA guarantees a portion of the loan. Learn more about this housing assistance program for veterans here.
Federal Housing Administration (FHA)
FHA Loans require as little as a 3.5% down payment, which can be in the form of gift funds. Private mortgage insurance is required for the life of the loan, and both an upfront premium and monthly payments are required. To understand more about FHA loans, turn to the U.S Department of Housing and Urban Development.
Down Payment Assistance Programs
Programs are available through local city and county governments, and nonprofit organizations. These programs often require homebuyer education classes and may be limited to first-time homebuyers. For a list of Colorado programs by county and city, visit the U.S. Department of Housing and Urban Development.
Colorado Housing and Finance Authority (CHFA)
CHFA was created in 1973 to address the shortage of affordable housing in Colorado. It offers a variety of programs to lower required down payments and monthly mortgage insurance premiums. Income and purchase price limits are based on county. For the latest information, you can visit CHFA online here.
House to Home Ownership Program (H2O)
This program provides down payment and closing cost assistance to borrowers purchasing property in the City of Boulder, with a maximum combined LTV of 105%. Requirements include being a first-time homebuyer, meeting an income threshold and working in Boulder city limits. Get details on the City of Boulder’s Homeownership Programs website.
Make a smart, informed decision when you’re ready to make an offer on a home in Colorado. You will be asked to share your down payment amount and sourcing with your lender and on the purchase contract. The Elevations Mortgage Team is ready to help you get started. Contact us today at (800) 429-7626 to set up a free virtual, phone or in-person appointment to discuss your questions about home financing and lending.**
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guaranteed or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Elevations Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
**Elevations Credit Union is an Equal Housing Opportunity lender.