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.
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.
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.