MYTH: You must provide a 20% down payment on a home
One of the most common misconceptions homebuyers face today is that they are required to make a large down payment on their first home purchase. While there are still benefits to providing 20% down, most mortgage loans do not actually require that much. Still, many Americans, especially first time home buyers, are misled by the media, their parents or their mortgage lenders to believe that they need to save money to put 20% down on the purchase of a home. That thought couldn’t be more wrong.
FACT: The average down payment was only 8% in 2017
If that’s true (which it is!) that tells us that some home buyers provided down payments that were even less than 8%, according to a survey done by the National Association of REALTORS. Many buyers are unaware that there are several low-or-no down payment options that most buyers can easily take advantage of.
MYTH: There are no benefits to making a higher down payment
There are many benefits to making any type of down payment, period. Although not always necessary nor required, providing a down payment creates a lower loan balance. In return, the buyer gets to make smaller monthly payments and pays less interest over the life of the loan. With some conventional mortgage loans, providing a down payment of at least 20% will eliminate the need for the mortgage lender to require Private Mortgage Insurance (PMI). In addition, with a greater down payment, a buyer may receive a better mortgage rate.
FACT: There are drawbacks to making a down payment
The most obvious drawback is simply not having the cash in the bank to make a down payment and having to wait longer (to save) to get financing for a mortgage loan. Even if you do have the needed cash in your savings, completely depleting your account is likely not a smart move in the event of an emergency or repairs needed for the house. Still, many choose to provide a down payment to help lower their mortgage rates. Which is a smart idea in theory, however, even with a large down payment there is no guarantee that a lender will grant you a better rate with more money down. A mortgage rate is determined by many factors and the amount of the down payment is only a small factor when determining the rate.
MYTH: There are no options for buyers who want a low-or-no down payment option
If you are working with a good mortgage lender he/she should be able to let you know what loan options and/or assistance programs are available in your area. Most financial institutions have applications readily available for down payment assistance programs or at the very least can provide a buyer with a local web address to complete the application. Buyers need to be prepared to speak up to mortgage lenders and have confidence that there are assistance programs available and should not be afraid to ask their lender what is available for use in the local area. Just like with any purchase, online search engines are a great resource to research financial aides in the state of purchase.
FACT: There are four common low-or-no down payment mortgages used today
We told you it’s possible to buy a home or condo without putting 20% down, the benefits and drawbacks of making a down payment and explained that there are assistance options available, and now it’s time to tell you what some of those options are.
An FHA loan is a popular choice, especially for first-time homebuyers and those with low credit scores. An FHA loan only requires a down payment of 3.5% of the home’s purchase price for a buyer with a credit score of 580 and above. Buyers with a credit score of 500-579 can obtain this type of loan if a 10% down payment is made. Each loan is insured by The Federal Housing Administration and features lower underwriting standards and rates compared to conventional loans. In order for a lender to get the FHA’s insurance on its loans, the lender must verify that the loan meets the minimum Federal Housing Administration’s qualification standards.
VA Loans are available to active-duty members of the United States military and veterans of the armed services. These mortgages boast a 100% financing option with mortgage rates almost always lower than those of other programs. Although there is a small funding fee added to the total of the loan, VA loans do not require the purchase of Private Mortgage Insurance (PMI). Each VA loan is guaranteed by the United States Department of Veterans Affairs (VA) and because of this, the bank assumes less risk and therefore makes it much easier for first-time buyers to get approved for this type of loan.
A USDA Loan also allows for 100% financing. This loan is available for those interested in purchasing a home in rural areas and less-dense suburban neighborhoods nationwide. With mortgage rates comparable to the VA loan, they remain relatively low. As with the other loan options mentioned above, the government backs this type of loan, in this case, the United States Department of Agriculture.
The Conventional 97 is a loan that is most popular if the other three are not an option. Offered by Fannie Mae, this type of loan only requires a 3% down payment. Compared to other 3% conventional options this loan has fewer eligibility restrictions. This loan is generally a better option for buyers with above-average credit scores as their credit will help determine the rate of the buyer’s mortgage insurance (buyers with lower credit scores would benefit more by using an FHA loan). With this type of loan, conventional Private Mortgage Insurance (PMI) is cancelable when your home reaches 20% equity. Whereas with an FHA loan, a homeowner is required to refinance the loan to cancel its mortgage insurance.