Okay, let’s clear something up. Sure, there was a time in pretty recent history that you could only buy a home if you were able to put a 20% down payment or more on that home (sounds like a lot of dough, no?). But today, with government-assisted, first-time home buyer programs and historically low interest rates, buyers of all backgrounds and income levels have plenty of down payment options to choose from (phew!). So instead of worrying where you’re going to find that 20% down payment, let’s take a look at some more inclusive alternatives.
Going the conventional loan route? A 20% home down payment is no longer the norm.
One caveat to putting anything less than 20% down: You’ll need to pay for Private Mortgage Insurance (PMI) so your lender is covered in case you miss a mortgage payment.One of the biggest misconceptions in home buying is the bigger down payment the better. Berenice Perez, Bungalo Mortgage VP of Consumer Experience, says that isn’t always the case. “I always advise buyers to leave themselves a savings cushion whenever possible,” says Perez. “If putting 20% down means you have to liquidate your entire savings, then I would highly encourage you to consider putting less down,” says Perez.
Pre-approved for a conventional mortgage? It’s actually possible to put as little as 3% down. It’s not all or nothing either: With many conventional lenders, you can now opt for a 5%, 10%, or 15% down payment too. At the end of the day, it just depends on what home you want to buy (location, mortgage value) and what makes sense for your own individual financial situation (savings, household income, credit history, debts).
Buying with an FHA Loan? Close on a home with as little as 3.5% down.
Backed by the Federal Housing Administration (FHA), FHA loans are a common financing path for first-time home buyers who don’t have a lot of cold hard cash to pay up front. But there are pros and cons to consider with this option. On the pro side, if you have the right credit score, you can get approved for an FHA loan with a low down payment of 3.5% for a variety of single-family homes and other housing options. On the con side, not all homes qualify for the FHA loan. The program’s rules basically take fixer-uppers off the table, protecting the home buyer from expensive repairs and other surprises. That means if you go this route, you’ll more than likely need to find a home that’s move-in ready (or close to it). You should also know that an FHA loan usually means higher Mortgage Insurance Premiums and with them, higher monthly mortgage payments. Perez says this is because “FHA loans carry two types of mortgage insurance so they can be a costly alternative in the long run.” Ultimately, you just have to decide if the slightly higher monthly payments are worth the low down payment.
Can’t afford a large sum up front? You may be able to buy with no down payment.
Depending on your household income and what locations you’re interested in, one lesser known low- or no- down payment program you might be eligible for is the US Department of Agriculture (USDA) Rural Housing Loan. Through the USDA loan, buyers who qualify can finance up to 100% of their home purchase. That means, aside from closing costs, you can pay zero dollars down, zip, nada. Don’t want to live next to a pasture? No problem. Many homes in suburban neighborhoods can qualify for the USDA loan too, so you can still live near the city.
Finally, there’s the US Department of Veterans Affairs (VA) loan, which helps military families and veterans become homeowners. The VA loan doesn’t require a down payment either, AND eligible buyers don’t have to pay for Private Mortgage Insurance. Thanks for looking out, Uncle Sam.
Point is, you have options for your home down payment. So put your mind at ease.
Even if you don’t have a big chunk of savings to drop on a down payment, you too can become a homeowner. “At the end of the day what matters most is that you feel comfortable with your monthly housing payment,” says Perez. “A good Loan Specialist will start there and work backwards to help you figure out the ideal down payment for your situation.”
This article is meant for informational purposes only and is not intended to be construed as financial, tax, legal, real estate, insurance, or investment advice. Bungalo always encourages you to reach out to an advisor regarding your own situation.
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