20% down payment Archives

Do you believe that you need 20% to put down on a home before you can get a mortgage? You aren’t alone, but you are incorrect. There are several loan programs, including a conventional loan, that allows you to buy a home with much less than 20% down on it.

Looking for Current Mortgage Interest Rates? Click Here.

While it’s true that you need 20% down on a home if you want to avoid paying Private Mortgage Insurance, you can certainly get a loan without that large down payment. In fact, in some cases, it’s wise to avoid making the large down payment. If you don’t have an emergency fund, saving the money in a liquid savings account may be a wiser choice for you in the first place.

Ways to Buy a Home Without 20% Down

So, what are the ways that you can buy a home with less than 20% down? We list them below.

Conventional loans – Many conventional lenders require just 5% of the purchase price of the home to get conventional financing. With this low down payment, you will pay Private Mortgage Insurance, which can add between $30 – $150 to your payment depending on the size of your mortgage.
FHA loans – You only need 3.5% down on an FHA loan. You don’t need to be a first-time homebuyer as many people believe to secure this loan either. Anyone with a credit score of at least 580, debt ratios around 31/43, and stable employment may qualify. The FHA also allows borrowers to receive 100% of the down payment as gift funds. All FHA borrowers pay Mortgage Insurance for the life of the loan. Right now, borrowers pay 0.85% of the average outstanding principal balance of the loan.
VA loans – If you are a veteran that served at least 90 days during wartime or 181 days during peacetime, you may secure 100% financing for the purchase of a home. This means no money down on a home with a flexible financing program. The VA loan doesn’t require any type of mortgage insurance either. You just pay an upfront funding fee to the VA.
USDA loans – If you prefer rural living to city life, you may benefit from the USDA program. This loan also provides 100% financing. In order to qualify, your total household income must not exceed 115% of the average income for the area. The USDA does charge annual mortgage insurance, but it’s only 0.35% of the outstanding loan amount.

Click to See the Latest Mortgage Rates.

What’s the Benefit of a 20% Down Payment?

If there are so many programs that allow you to put down less than 20% on a home, why would you want to put 20% down? There are a few simple reasons.

You may have an easier time securing a mortgage approval. The more of your own money that you have invested in a home, the more likely a lender is to approve you for it. The higher down payment can offset a low credit score or high debt ratio, both of which are often risk factors that make lenders turn applicants down.
You may get a lower interest rate. The more money you invest in a home, the less risk the lender takes. Because lenders choose interest rates based on the risk that you pose, you may be able to secure that low interest rate you wanted for your mortgage.
You’ll have a smaller mortgage payment. The less money you borrow, the smaller your payment becomes. Who wouldn’t want a smaller monthly payment? You won’t’ have to worry about mortgage insurance. Your payment will be principal, interest, real estate taxes, and homeowner’s insurance.
You’ll build equity in the home faster. The first few years that you make mortgage payments, you will pay mostly interest on your payments. This means you touch the principal balance very little. This means you gain very little equity in the home. If you make a large down payment, though, you’ll have instant equity in the home.

Keep in mind, though, as we talked about above, it doesn’t always make sense to make the large down payment. If it is going to put you in a financial bind, you are better off keeping the money in a liquid account for financial emergencies.

It also may not make sense to put a lot of money down if you don’t plan to stay in the home for the long-term. If you know you will move in a few years, you won’t pay a lot of interest on the money you borrow, which allows you to keep your money liquid for the purchase of your next home when you do move.

Whether or not it makes sense for you to put 20% down on a home depends on your situation. Talk to a few lenders and get quotes for a variety of situations with and without a 20% down payment. This will help you decide which program would work the best for you.

Click Here to Get Matched With a Lender.

A Bigger Down Payment Will Always Be Better

Putting down 20% of the purchase price reigns supreme in terms of:

Private Mortgage Insurance

Monthly Payment

Costs and Rates

Bidding Wars and Price Declines

Goodbye Private Mortgage Insurance

A 20 percent-down guarantees that you won’t be paying any private mortgage insurance (PMI). Not paying between 0.5% and 1% a year for a mortgage insurance alone is a huge relief for your pockets.

These savings can be funneled to general repairs and maintenance your home might be needing in the future.

Monthly Payment for Less

Imagine buying a home with a price tag of $200,000. If you put at least 20% of that purchase price, which is $40,000 and take out a 30-year loan for the remaining $160,000 at 4.25%, your monthly payment will be $787.10.

Compared that with putting a downpayment of 3.5% or $7,000 and borrowing $193,000. For the same loan term and interest rate, you’ll be making $949.44 in monthly payments.

Less Borrowing, More Savings

The above calculations lead to this point: if you have borrow less, you’d pay for less in interest costs. For the mortgage with the 20% down payment, the total mortgage with interest that you’ll be paying is $283,357.38. The total mortgage with interest that you will be paying for the loan with the 3.5% down payment is $341,799.84.

The bigger the loan, the more costly it is to borrow. Which is why lenders put a higher rate on bigger loans, especially those that go beyond the conforming limit or jumbo loans. With a higher down payment and a lower amount to borrow, the lender can give you a better rate and lesser fees to open this loan.

For a Good Start

A higher down payment ensures that you have enough equity of 20% early on in your loan. This mitigates the risk of a negative equity position should housing prices go under as what happened during the housing collapse a decade ago.

Indeed, a big down payment ensures or increases the likelihood of you winning a multiple-bid war. A bid backed with 20% or even 30% off the purchase price is enough to get the seller’s attention.

Big for Less?

A large down payment serves to compensate some “bad” aspects of your loan like a bad credit score so it can still stand for approval by the lender.

Producing 20% of the purchase price is a lofty goal, an idea worthy to be considered if you think long term. However, no one is looking down on your ability to produce a little down payment. Just find ways to cut back on the other costs of your loan if you plan to make a small down payment.

Do you Really Need a 20% Down Payment to Purchase a Home?