The lack of down payment money to purchase a home is a very real problem among America’s home buyers. When we can’t even have savings for emergencies, how much more for a debt as enormous as a mortgage?
This is far from the only problem though. The continued scarcity of housing inventory is driving home prices up. So those who were able to set aside some money may find themselves short in light of the new increase in home values.
If you’re among the majority having trouble coming up with down payment money, the natural next step is to look for programs that allow less than 20 percent in down payment.
In actuality, the average mortgagee today no longer really follow the conventional 20 percent down requirement. According to a recent report on down payment realities in the land of the free, the average borrower only puts down around 10 percent of the purchase price when buying a home. Some experts even encourage borrowers to leverage their cash and use it for more rewarding investments.
There are also federal guarantee programs that don’t pressure you to put down the conventional down payment amount. The FHA, for instance, only requires its borrowers a down payment of 3.5 percent as long as they reach the minimum credit score requirement of 580 and above. If, however, the applicant’s credit score falls between 500 to 579, he or she can still qualify given that he at least put in 10 percent of the home’s purchase price.
Furthermore, the VA and USDA offer 100 percent financing without any down payment requirement. These specialty loans cater to specific segments of the borrower market. See if you qualify.
If, however, you don’t qualify for any of these programs, you can look into a down payment assistance alternative. Simply follow these steps:
1. Know the risks
When you pay less than the conventional 20 percent down payment requirement, you will have to pay for a private mortgage insurance. A private mortgage insurance protects the lender from investment loss if ever you fail to repay your loan back.
A private mortgage insurance typically costs around 0.5 to 1 percent of the overall loan balance depending on your credit score. Once you are able to earn at least 20 percent of the home’s value in equity, you can ask the lender to cancel your PMI payments.
However, this is not a general guarantee. The structure of mortgage payments may differ among programs. Federal mortgages such as an FHA loan, for example, requires the borrower to pay a mortgage insurance premium throughout the life of the loan if the borrower pays less than 10 percent in down payment.
2. Crunch the figures
Don’t think that after you pay your down payment, you are already free of any other costs. Home buying is daunting for a reason. Even if you can afford a full 20 percent down payment, you still need to consider closing costs, the money you need to set aside for furnitures, appliances, homeowners insurance when you move in, and there’s the cost that must be allocated for repairs and general maintenance throughout the year.
Furthermore, some lenders want to see liquidity in your bank statements. Experts recommend that you save at least 3 to 6 months worth of mortgage payments in your bank account as cash reserve.
Not only that. You also need to factor in your credit score. The higher your rating is, the lower the interest you will have, and vice versa. This is a major point of consideration, given how a single point difference in interest rates can sum up to thousands of dollars in interest payments during the entirety of the loan.
And of course, you need to consider the costs associated with a down payment assistance program. Get all the information you can from a down payment program lender so you can use it to compare the costs between a low down payment mortgage and a down-payment assisted loan.
3. List your options
There are now plenty of programs to accommodate a cash-strapped borrower. Consider the FHA’s 3.5 percent down payment mortgage, Fannie Mae’s HomeReady program, USDA and VA loans, and even low down payment options from private mortgage lenders.
However, before you forward your application, realize first that qualifying and affording a loan are two very different things. You must be financially ready to tackle the costly responsibility of having a mortgage.
After you’ve considered the risk, done the math, and went through your options, you now have the facts and figures you need to make an informed decision about whether or not to push through with a low down payment loan or to get a down payment assistance.Click to See the Latest Mortgage Rates»