You don't need 20% down anymore
Looking to get your foot in the door (of your new home)? If you’re a renter who’s tired of paying someone else’s mortgage, now may be the time to pursue the American dream of homeownership. In fact, the days of needing a 20% down payment are long gone.
While you can always elect to put down the full 20% or more, there are now many alternatives available. Here’s what you want to know if buying a house is in your future.
In the mortgage industry, 20% down is considered the benchmark down payment for looking strong on paper as a home buyer. While this a general standard for financial strength, it is by no means a requirement, nor is it necessarily expected.
However, keep in mind that your purchase offer amount – your buying power — drives negotiation. How strong you are on paper does help, but when you make an offer to buy a home, the seller of the property has no idea of your financial strength other than what your real estate agent tells them and what’s on your pre-approval letter. The price dictates whether you’re in the game for the house, or whether you’ll continue to be on the search.
Down Payment Options
So let’s say you don’t have 20% down for a home. While there are many benefits to having more equity in the home you’re buying, that doesn’t mean you’re out of the running for becoming a homeowner. There are options for lower down payments.
3.5% Down
For an FHA loan, the minimum down payment you would need to buy a home is 3.5% down. Most lenders can lend up to $417,000 with the exception of Alaska, Hawaii and Guam. An FHA loan comes with a monthly mortgage insurance payment, which can make it more expensive than a conventional mortgage.
In some more affluent markets, the higher loan amounts (per county) allow someone with strong income and less cash to still get into the market.
5% Down
Another popular choice for buyers is using a conventional loan with 5% down. There are loan size amounts up to $417,000 (with the exception of Alaska, Hawaii and Guam) going as high as $417,000 with as little as 5% down. An alternative to the higher-priced FHA loan, the conventional loan allows for getting rid of the PMI after accumulating 20% equity after a minimum of 24 months.
0% Down
Two options exist for 0% down financing, one being through the U.S. Department of Veterans Affairs. The program allows a veteran to purchase a house for literally no money down. Yep, the purchase price and loan amount are equal.
The caveat? Actually, there are two: The program is for military veterans only, and the home must pass a clear pest report. This option could be optimal for brand-new construction or for property where any pest damage can be fixed in time for closing.
An alternative to this program is a loan guaranteed by the U.S. Department of Agriculture, USDA. You need not be a veteran for this particular loan, however in some areas, you may not be eligible to use the program due tighter qualifying income-to-payment ratios and location. The program also only works for homes designated rural by USDA. Additional income limitations also apply. For example: For a family of four, a household income cannot exceed $96,400 per year.
All of these options allow for the use of gift funds. Family members, cousins, relatives – these are all excellent sources to tap for possible down payment or closing costs (usually about 2% of the home price). Even if you already own a home and are looking to upgrade, all of these programs could present a viable option to bridging the gap between buying a home for the right price in the right area of vs. continuing to be on the search.
More questions? Contact us today.
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