You Don’t Need A 20% Downpayment To Buy A Home
Unfortunately, the “20% Downpayment Myth” is widely circulated; passed down from parents to children; and college professors to students. There is a good reason why people endorse the 20% down payment — without it, buyers are subject to mortgage insurance payments which add to monthly housing costs. To avoid mortgage insurance payments, many buyers choose to put 20% down, even though it’s not required or necessary. More important than making a 20% downpayment, is choosing the most appropriate loan for your downpayment needs.
First-time home buyers face more hurdles than repeat buyers. A first-time home buyer usually has less money saved for a down payment, may have a collection of student loans and other large debt, may be just starting a career, and may have less experience with the home-buying process. A first-time home buyer may even be about to live on their own for the very first time. According to the National Association of REALTORS®, first-time home buyers account for 1-in-3 homes sold nationwide. Yet, with mortgage rates low and an abundance of down payment options available from mortgage lenders, there’s never been a better time to get approved for your home loan.
What Does It Mean To Make A “Down Payment”?
When you buy a home, you have the option of paying for it with cash from your bank account; or, with money you’ve borrowed from a bank.
Sometimes, a bank will lend you the entire amount you need to buy a home. This is known as 100% financing. These types of loans are either USDA loans, or VA loans, which have special terms for those borrowers who can qualify for these loans. However, you may not qualify to borrow 100% of a home’s purchase price, or the bank may not allow it. The monies you pay from your own bank account is known as your “downpayment”. As an illustration, if you purchased a home for $100,000 and wanted to make a ten percent down payment, at closing, the bank would have $90,000 for you while the remaining $10,000 would be sourced from your savings.
Down Payments Gifted:
As a home buyer, the size of your down payment depends on your available cash on hand, or ability to secure cash for a down payment. There are special programs available where banks allow borrowers to secure the down payment from parents or other family members in the form of a “gift letter”. This “gift letter” is a form that allows a home buyer to borrower the down payment funds from a family member that is gifted to the home buyer.
SIZE OF THE DOWN PAYMENT:
Your choices regarding your down payment depend on how much cash you have available and what loan you might qualify for. Each choice has its benefits. When you make a large down payment, you borrow less money from your lender and reduce your monthly mortgage payment. You own “more” of your house sooner and may get access to lower mortgage rates. When you make a smaller down payment, you get the benefit keeping cash in your savings account for life’s emergencies. It also means that you can buy a home today instead of waiting for years for a larger down payment.
HOW MUCH DOWN PAYMENT IS REQUIRED
As a first-time home buyer, you have access to a wide range of mortgage loans and mortgage loans can be customized to meet a buyer’s needs. The size of your down payment is one such customization. Your down payment can be as large as you wish, or as small as the minimum down payment required by your lender. The five most-common low- and no-down payment mortgages used by first-time home buyers are the FHA loan, the VA loan, the USDA loan, the Conventional 97, and the HomeReady™ mortgage. Each is described below.
THE FHA LOAN:
FHA loans require a down payment of 3.5% of a home’s purchase price, at minimum. FHA loans are common among first-time home buyers because the program allows for below-average credit scores and there are no special qualifications. Credit scores as low as 580 is possible. FHA mortgage approval standards are considered to be the most-friendly toward first-time buyers.
THE VA LOAN
VA loans are available to members of the U.S. military and veterans of the Armed Services. VA loans provide a 100% financing option, and VA mortgage rates are often the lowest as compared to other low- and no-downpayment mortgage loans.
THE USDA LOAN
USDA loans also allow for 100% financing. The program is available for homes in rural areas and less-dense suburban neighborhoods nationwide. USDA mortgage rates are often as low as VA mortgage rates.
The Conventional LOAN is a LOW down payment program available to home buyers with above-average credit scores. The Conventional 97 loan allows buyers to receive cash gifts for their down payment. The program has a loan size limit of $417,000.
1% DOWN CONVENTIONAL LOAN
This is a special program where qualified buyers pay only 1% down payment of the purchase price. Buyers must have “above average” credit history, 700+ credit scores. The lender gifts the home buyer 2% of the purchase price.
(Enroll in Turbo University- Course 14- for full details about this program)
HOMEREADY TM CONVENTIONAL LOAN
This is a special program where home buyers pay a 3% down payment. With HomeReady, home buyers can “POOL” all the income from all members of the household in order to qualify for the loan.
A great alternative for borrowers with less than perfect credit scores. Borrow up to 95%, with a 5% down payment. Great for first time home buyers with credit scores of at least 660.