When most people think of buying a home, their key consideration is the down payment. While lots of aspiring homeowners are aware of the traditional 20% down payment avenue, it's best to educate yourself on all of the options available. Lets take a look at the minimum down payments for different mortgage loans, providing clarity to help you plan and make informed decisions on your path to owning a home. Most think, "I don't have 20% down". Well guess what, you don't need anywhere near 20%! Here are your mortgage down payment options when buying a home.
Traditional Down Payment: The most common and widely known option is the traditional down payment, typically 20% of the home's purchase price. While this is the historical benchmark, it's important to note that most lenders offer flexibility, and there are some mortgage programs that currently go as low as 3% down. Keep in mind that a higher down payment often leads to slightly more favorable loan terms and can reduce the overall cost of the mortgage. Always check with a reputable and highly-experienced mortgage professional to review the different down-payment options.
FHA Loans - Low Down Payment Option: Federal Housing Administration (FHA) loans provide an excellent avenue for those with limited funds for a down payment. With a down payment requirement as low as 3.5%, FHA loans make homeownership more accessible to many. This option is particularly beneficial for first-time homebuyers or those with modest incomes. It can provide more options to those with higher debt-to-income ratios and sometimes spotty credit.
VA Loans - Zero Down Payment for Veterans: Veterans and active-duty military personnel can enjoy the lucrative benefits of VA loans, which often come with a zero (0%) down payment requirement. Backed by the U.S. Department of Veterans Affairs, VA loans are a powerful tool to support those who have served in the military on their way to homeownership. Keep in mind that if you're not active or a veteran (or have a deceased vet spouse) and don't have a DD214 or COE, you generally wouldn't be able to take advantage of this type of loan.
USDA Loans - No Down Payment in Rural Areas: The U.S. Department of Agriculture (USDA) offers loans with no down payment requirements for eligible properties in designated rural areas. This program aims to promote homeownership in less populated regions, making it an attractive option for those seeking a home in such locations.
Conventional Loans with Private Mortgage Insurance (PMI): Conventional loans may also be obtained with a down payment much lower than 20%, and in such cases, private mortgage insurance (PMI) is typically required. PMI protects the lender in case of default and allows borrowers to secure a mortgage with a more manageable down payment. I've seen current conventional loans go as low as 3% down (first-time homebuyer's).
State and Local Down Payment Assistance Programs: Many state and local governments offer down payment assistance programs to help individuals overcome financial barriers to homeownership. These programs may provide grants, low-interest loans, or other forms of assistance to eligible homebuyers, fostering inclusivity in the real estate market. If you live in Orange County, CA or other parts of California, you can check out the CalHFA website.
Gifted Down Payments: Many mortgage programs allow borrowers to use gifted funds for their down payment. Most of the time, this can come from immediate family members, friends, or other sources, enabling homebuyers to meet the down payment requirement with the help of others.
Piggyback Loans - Combining Two Mortgages: A creative approach to down payments involves utilizing a piggyback loan strategy, where two mortgages are taken out simultaneously. The first mortgage covers the majority of the home's value, while the second, smaller loan serves as the down payment. This strategy can help borrowers avoid PMI and secure financing with a lower initial cash commitment.
Mortgage Down Payment Options When Buying A Home - Bottom Line:
Understanding that the myth of "needing 20% down" is not a real thing opens up many to the idea of buying a home in the future. There are many benefits and advantages that come along with homeownership. While there are so many down payment options available, education about the benefits and disadvantages of each option is crucial for prospective homebuyers. Whether opting for a traditional down payment, exploring government-backed loans, or leveraging assistance programs, each option comes with its unique advantages and considerations. For most, they have many different myths associated with the idea of buying a home and talking with highly-experienced mortgage professional can answer their questions.
Reach out to Ross if you have any unanswered questions that you'd like to ask him. He has helped over 1,000 homeowner's and is highly experienced.