For first time home buyers, getting a mortgage loan and saving for a down payment can be daunting. Many struggle to get approved, feel like they will never reach their savings goal, or cannot afford to pay off the loan they get approved for. There are many options like low or zero down loans, as well as more unique options like crowdfunding or cash back savings while shopping. All of these options have pros and cons to be considered before pursuing one.
The obvious pros to a low or zero down payment loan are that you can get the loan sooner and the savings can be spent on other things like improvements and expenses(NerdWallet). However, there are cons. With a low down payment, you may get a higher interest rate because you are seen as a higher risk. In a lender’s eyes, you are more likely to not be able to make a payment than someone who could afford to make a larger down payment. Low or no down payments also mean lower equity in your home. With low equity, a drop in the real estate market could mean that if you want to sell, your profit may not pay off or break even with what you still owe on the mortgage(NerdWallet).
A unique alternative to saving is HomeFundIt, which has both a Cash Back Program and a Crowdfunding Program to help newlyweds, young families, or anyone who might need a little help saving for their home! The Cash Back Program gives users up to 20% back on purchases at select retailers, and stores it in a secure savings account. Their other program allows users to set up a Crowdfund where friends and family can donate to help meet their savings goal. They can choose to make their donation conditional, so if the goal isn’t met, the money is returned to them, or non-conditional, where the user keeps the money either way.
This is typically seen as a low risk way to buy a home but in fact, it is very risky. To sign a lease with a landlord that is both your landlord and a seller is too complicated. If you have low credit or are looking to build equity in order to eventually get a mortgage, renting-to-own is a slow way to do so since you don’t gain equity while renting(TheBalance). You also risk losing all of the down payment monies that you have already given to your landlord/seller. The benefit is that you get to try the house out before you own it. If you are interested in renting-to-own, you should consult a real estate lawyer because they will be able to advise you on the risks and benefits of your specific transaction.