Have you ever heard that you need 20% of the sale price of a home for a down payment in order to purchase that home? That age-old myth is FALSE! But how much down payment do you need to buy a house, and what are some of the mortgage options out there to help you buy your dream home with less than 20% (and in some cases, NO down payment)?
When people think conventional loans, they think 20% down payment. But that simply just isn’t true. There are many conventional loans available that are very popular in today’s financing world that are far less than 20% down – some are even around 3% down, lower than an FHA loan!
Conventional loans typically are less restrictive than government-secured loans when it comes to property-type and appraisal methods, BUT can be a bit more difficult to qualify for in the first place. A solid credit score, and a lower debt-to-income ratio are preferred amongst lenders who issue these types of loans.
For conventional loans, you can either have a fixed-rate or adjustable-rate (ARM). A fixed-rate loan means that the interest rate will not change over whatever life of the loan you’ve established. You’ll pay the same interest rate today as you do 30 years from now with a 30-year fixed conventional loan. With an adjustable ARM loan, you’ll pay an ultra-low interest rate for a set period of years (3, 5, 7 years), but then rates will adjust and can result in much larger payments. If you’re planning on living somewhere for a short time, an ARM loan may be the best option for you.
The magical 20% down payment mark you hear all the time typically refers to the level of down payment/instant equity that triggers the Private Mortgage Insurance (PMI) to go away. This PMI protects the lender in case of a default, but can be removed or avoided altogether with 20% in built equity in the home. The PMI needs to be factored into your monthly payment and can lower the sale price of the home you’ll eventually be able to qualify for, so keep that in mind.
Did you know there are loan programs that can allow you to purchase a home for NOTHING down? That’s right, 0% down payment. It exists, but there are some caveats.
The United State Department of Agriculture backs USDA mortgage loans that encourage people to buy homes in rural areas. These loans require NO down payment at all with full home price financing available. The requirements are associated with the location of the home, and if that’s in an area the USDA considers “rural”. Fortunately, in Lancaster County and the surrounding areas, these “rural” zones are plentiful, and it’s common for homes to be in a USDA qualifying area! To see what areas qualify, check out the USDA eligibility map here.
Another 0% down loan program is especially for veterans who have served our country (and surviving spouses). The U.S. Department of Veteran Affairs office offers a VA Home Loan program. Not everyone qualifies for this type of loan, and there are some eligibility requirements, so be sure to check with the VA’s Office to see if you are eligible.
A very popular type of government-backed mortgage loan is one that has a far-reaching impacts on millions of people and helps significantly for people with lower credit scores. The FHA program allows people with FICO scores less than 600 qualify for mortgage loans that would be difficult to obtain going the conventional route. In addition, the debt-to-income ratio required is typically higher, meaning you can have a little more monthly debts than a conventional loan would allow.
FHA loans require 3.5% down for FICO scores 580 and above, and 10% down if your FICO score is between 500-580. Another benefit of the FHA program is that closing costs can be wrapped into the mortgage payment, so it’s possible to obtain a home with as little as 3.5% of the sale price of the home and nothing else (since closing costs would be wrapped into the monthly mortgage payment).
With everything good about the FHA loan, there are some sticking points. First, the inspection and appraisals are a bit more tedious and strict than other loans, and certain homes may not even qualify for FHA financing. Also, the Mortgage Insurance Premium (MIP) doesn’t ever come off if you’re putting down less than 10%. You’d have to refinance to a different loan type once you reach 20% equity to avoid any MIP/PMI.
If you’re looking to buy a home, there are many different loan types and programs offered for different people. The absolute best option is to speak with several lenders about programs they may offer.
Another option (and an option I think is the way to go for most people) is to speak with a mortgage broker, who can look at many or all of the different loan types from different institutions and bring you the best rate and advise you for the best course of action for your situation. The best part? Most mortgage brokers are paid by the lenders, NOT you! That’s a win-win!
If you’re thinking about buying a home soon, let’s get in touch. In this hot seller’s market, buying a home can be tough if you’re not represented with someone who knows this market and the different strategies to help you come out on top. Use the contact form below, or head to my contact page to get started!
I'll be in touch with your shortly. if you need to get ahold of Matt earlier please call him directly at 717-585-4522