Coming up with enough cash to put down when buying a house is the single biggest roadblock for most hopeful home buyers. But how much do you really need? What can you do to put down less money up front? Start with these Do’s:
DO: Recognize the benefits of putting down 20%. The first thing to consider is that a lower down payment makes you a bigger risk in the eyes of the lender. Statistically, the more the homebuyer invests upfront in the property, the less likely he or she is to default on the loan. But there are other benefits to a 20% down payment, too:
•Lower upfront fees
•Putting 20 percent down allows you to avoid private mortgage insurance (also called lender's mortgage insurance). PMI is extra insurance that lenders require from most homebuyers who obtain loans in which the down payment is less than 20 percent of the sales price or appraised value.
•Lower ongoing fees
•More immediate equity in your home
•A lower monthly payment
DO: Research federal programs that can provide financial assistance [INSERT LINK (Read: ‘Take Advantage of First Time Homebuyer Programs)]. “Lenders prefer 20% down payments but there are government-backed programs that require much less,” according to nerdwallet.com.
•The Federal Housing Administration (FHA) is a government agency charged with helping home buyers (especially first-time buyers) get approved. The FHA does that by assisting mortgage lenders in making loans by guaranteeing a portion of the balance. This allows you to put less money down. In some cases, as little as 3.5%. Plus, FHA loan rates are among some of the lowest you’ll come across. (Read: ‘5 Common Myths of VA and FHA Loans’)
•Fannie Mae and Freddie Mac are the government-sponsored companies that drive the residential mortgage credit market. They offer 3% down payments on home loans.
•Some major commercial lenders are also offering low down payments — and even no down payments — as incentives to spur loan demand (as stated on bankrate.com).
•Active or retired service members and those living in rural areas may have access to zero down payment programs through the Department of Veterans Affairs (VA) or the Department of Agriculture’s (USDA) Rural Development program. It’s always a good idea to ask a lender about down payment options when you’re shopping for a mortgage.
With that being said…
DO: “Get qualified for an FHA AND a conventional loan,” suggests Eli Ristine from Pan Florida Realty. This way, you’ll be powerful position regardless of which type of loan you end up going with. If you’re approved for an FHA Loan, you reap all the benefits of that program; providing a conventional 20% up front on that type of loan gives you a substantial advantage. And of course, if you choose a conventional loan, well – we’ve already talked about the benefits above.
DO: Keep your eye on the fees. Some programs don’t require mortgage insurance, but will charge an “upfront guarantee fee” or “funding fee.” “Whatever you call it, a fee is a fee,” says Hal M. Bundrick, certified financial planner and writer for nerdwallet.com. “And as a higher risk, you’ll likely pay a higher interest rate for the life of the loan in addition to the other fees.”
DO: Research Self-employed buyer programs. Although securing a mortgage while self-employed may prove a bit more challenging, you can still qualify to buy a home. In some cases, you may even be able to take advantage of FHA and/or VA loans. Lenders who offer Self-Employed Home Loans typically offset the additional responsibility that applicants have when running a business by requiring proof of a longer track record of earning. This means that you will have to provide more extensive income verification and documentation. The good news is, “despite the extra steps needed to verify your self-employed income, you can still qualify for the same mortgage programs as anyone else,” according to pennymacusa.com.
DO: Keep in mind that in addition to the down payment, you will need money for closing costs and other fees. (Suggested: ‘Want a Smooth Closing? Avoid These 6 Things’)
As you can see, when you're planning for a down payment, there are additional considerations beyond just "how much can I afford to put down". Hopefully our list of Do’s helps you consider your down payment not just in terms of the lender’s risk vs. reward, but your own as well.
Sources: forbes.com; nerdwallet.com; pennymacusa.com; hud.gov
DO: Recognize the benefits of putting down 20%. The first thing to consider is that a lower down payment makes you a bigger risk in the eyes of the lender. Statistically, the more the homebuyer invests upfront in the property, the less likely he or she is to default on the loan. But there are other benefits to a 20% down payment, too:
•Lower upfront fees
•Putting 20 percent down allows you to avoid private mortgage insurance (also called lender's mortgage insurance). PMI is extra insurance that lenders require from most homebuyers who obtain loans in which the down payment is less than 20 percent of the sales price or appraised value.
•Lower ongoing fees
•More immediate equity in your home
•A lower monthly payment
DO: Research federal programs that can provide financial assistance [INSERT LINK (Read: ‘Take Advantage of First Time Homebuyer Programs)]. “Lenders prefer 20% down payments but there are government-backed programs that require much less,” according to nerdwallet.com.
•The Federal Housing Administration (FHA) is a government agency charged with helping home buyers (especially first-time buyers) get approved. The FHA does that by assisting mortgage lenders in making loans by guaranteeing a portion of the balance. This allows you to put less money down. In some cases, as little as 3.5%. Plus, FHA loan rates are among some of the lowest you’ll come across. (Read: ‘5 Common Myths of VA and FHA Loans’)
•Fannie Mae and Freddie Mac are the government-sponsored companies that drive the residential mortgage credit market. They offer 3% down payments on home loans.
•Some major commercial lenders are also offering low down payments — and even no down payments — as incentives to spur loan demand (as stated on bankrate.com).
•Active or retired service members and those living in rural areas may have access to zero down payment programs through the Department of Veterans Affairs (VA) or the Department of Agriculture’s (USDA) Rural Development program. It’s always a good idea to ask a lender about down payment options when you’re shopping for a mortgage.
With that being said…
DO: “Get qualified for an FHA AND a conventional loan,” suggests Eli Ristine from Pan Florida Realty. This way, you’ll be powerful position regardless of which type of loan you end up going with. If you’re approved for an FHA Loan, you reap all the benefits of that program; providing a conventional 20% up front on that type of loan gives you a substantial advantage. And of course, if you choose a conventional loan, well – we’ve already talked about the benefits above.
DO: Keep your eye on the fees. Some programs don’t require mortgage insurance, but will charge an “upfront guarantee fee” or “funding fee.” “Whatever you call it, a fee is a fee,” says Hal M. Bundrick, certified financial planner and writer for nerdwallet.com. “And as a higher risk, you’ll likely pay a higher interest rate for the life of the loan in addition to the other fees.”
DO: Research Self-employed buyer programs. Although securing a mortgage while self-employed may prove a bit more challenging, you can still qualify to buy a home. In some cases, you may even be able to take advantage of FHA and/or VA loans. Lenders who offer Self-Employed Home Loans typically offset the additional responsibility that applicants have when running a business by requiring proof of a longer track record of earning. This means that you will have to provide more extensive income verification and documentation. The good news is, “despite the extra steps needed to verify your self-employed income, you can still qualify for the same mortgage programs as anyone else,” according to pennymacusa.com.
DO: Keep in mind that in addition to the down payment, you will need money for closing costs and other fees. (Suggested: ‘Want a Smooth Closing? Avoid These 6 Things’)
As you can see, when you're planning for a down payment, there are additional considerations beyond just "how much can I afford to put down". Hopefully our list of Do’s helps you consider your down payment not just in terms of the lender’s risk vs. reward, but your own as well.
Sources: forbes.com; nerdwallet.com; pennymacusa.com; hud.gov
Take Advantage of First Time Homebuyer Programs