A fun question to ask people is how much do they think a down payment is going to cost them. The answer might surprise you.
What is the RIGHT Answer?
Its hard to tell someone what their down payment will be. However, the down payment should not be the reason you can’t achieve your dream of home ownership. Coming up with a down payment is tough when you are trying to pay for rent, savings, college for your children, and any potential emergency funds. Adding thousands of dollars for a down payment is going to be tough. Financial planners will tell you about the 20 percent down payment because anything less means you are going to have to pay mortgage insurance.
Yes, if you have the money, putting down a larger down payment will have its advantages. Just understand that everyone can take a different path and end up at the same finish line. It follows under the same logic of putting money down on a car, the more money that you put down, the lower the payments will be and the faster you can pay it off.
Mortgage Insurance 101
Definition of Mortgage insurance by the FHA:
“…a policy that protects lenders against losses that result from defaults on home mortgages. FHA requirements include mortgage insurance primarily for borrowers making a down payment of less than 20 percent”.
The average annual cost is 0.5% to 1.0% or more of the loan amount, which is divided by 12 and added to your monthly house note.
Lets use an example:
- You purchase a home $100,000 (nice huh?)
- You put ten percent down of $10,000.
- The terms are 30 years at 4%
Based on these factors, you wouldn’t get a remaining balance of $80,000 until late into year 5 of your payments. Then you request cancellation of your mortgage insurance. Obviously, the shorter the term, the faster you pay down the principle and the PMI would be cancelled faster. Also note that the appreciation of your home can change the time paying your PMI.
There are options out there that will get you into a home without putting 20 percent down on the home. They include:
- VA Loans – Veterans must be informed about a VA Loan. We covered more information about it here, and our webpage features a veterans guide to start the learning process.
- USDA Loans – Veterans are not the only ones who can benefit from these types of loans. Check out a “USDA Rural Housing Loan”. And no, you don’t have to live in a rural area to qualify. These loans were made so low to moderate income home buyers have an opportunity at getting into a home.
Some benefits are quoted from Mortgage Reports. They include:
- You may include eligible home repairs and improvements in your loan size
- There is maximum home purchase price
- Guarantee fee added to loan balance at closing; mortgage insurance collected monthly
- Another key benefit is that USDA mortgage rates are often lower than rates for comparable, low- or no-down payment mortgages.
Banks and Credit Unions
- If you have good credit and can demonstrate your ability to pay back your loans, check your banks and local credit unions. They will sometimes offer no down payments or very small down payments. However, since the crash of 2008, this is not going to be a likely offer anymore.
- If you are fortunate enough, you can have your down payment payed as a gift from a family member. Depending on your loan program, they will allow all of the down payment to be paid for by a gift.
- You can take money from your 401k to pay the down payment. Make sure to follow the rules to avoid a tax penalty. Be careful, that might not be the most wise choice to make. Its a risk you must understand before going into it. If you do not understand this, its probably not an option you should consider.
The minimum down payment for a mortgage are¹:
- VA loan: 0% down payment
- USDA loan: 0% down payment
- Conventional 97 mortgage: 3% down payment
- HomeReady™ mortgage: 3% down payment
- FHA loan: 3.5% down payment
I covered some of the more popular ways people achieve their dream of owning a home. As you can see, there are many different types of resources available to you. It just is a matter of finding what works best for your situation. If you still have questions, we would love to help!