Many first-time home buyers think they need a 20 percent down payment to purchase a home, but that’s not always the case. In fact, according to a recent industry report, more than one-third of purchase loans are being approved with less than four percent down payments.
So, where do you find the loans that don’t require 20 percent down?
Down Payments 101
First, let’s talk down payments in general. A down payment is a percentage of the sales price that a lender requires the home buyer to pay upfront. To purchase a $200,000 home, for example, you would need to save $40,000 plus additional cash for closing costs, cash reserves in case of an emergency, and moving costs.
That’s a huge chunk of money, but there are a few advantages to following traditional wisdom and putting 20 percent down. For starters, you’ll have 20 percent equity in your home on the day you move in. You’ll also usually qualify for a slightly lower interest rate than a borrower who makes a smaller down payment, and you won’t need to pay private mortgage insurance (PMI) to insure the lender in case you default on the loan.
But, the downside is that while you are saving your 20 percent down payment, home prices will theoretically continue to go up, meaning you might actually get less home for that $40,000 down payment in our example because $200,000 will buy less house at a future date. In other words, it might just make sense to put less money down after all.
Your Loan Options
Conventional loans can require as little as five percent down, but it’s rare to find one that requires less than a ten percent down payment. Twenty percent is standard for conventional loans, as the industry report indicates. It’s important to note, though, that the smaller your down payment and the lower your credit score, the higher your PMI will be.
However, the average down payment on a FHA loan was four percent. If you wanted to purchase a $200,000 home with the minimum 3.5 percent down payment, you’d only need to save $7,000, versus the $40,000 required to make a 20 percent down payment. Plus, the government-backed FHA loan program has a less stringent underwriting process that is more forgiving when it comes to credit scores, incomes, and assets.
Better still are VA loans, which require no down payment at all. The drawback is that, to be eligible, you must have served in the U.S. Armed Forces or been a member of the National Guard or Reserves. In some cases, spouses of deceased veterans are also eligible. Like the FHA loans, VA loans usually have less stringent underwriting requirements.
The Bottom Line
Of course, the only way to find the best loan for you is to sit down with an experienced lender and discuss your options. The important thing to know, though, is home ownership may not be as difficult to save for as you originally thought.
Give me a call today to chat about finding your dream home in Scottsdale or anywhere throughout the Valley of the Sun. Home ownership is just within your reach, especially when interest rates are still this low.
