The Down Payment: Are You There Yet?
One of the biggest hurdles aspiring homebuyers face is often saving enough for a down payment, but you may be closer than you think.
The 20 Percent Rule … Was Made to be Broken
The rule of thumb for down payments has traditionally been 20 percent of a home’s purchase price. It’s a lender thing. Essentially, the larger the down payment, the easier it may be for a lender to say “yes.”
However, twenty percent down may not viable amount for many first-time homebuyers. This is particularly true for those who live in markets with high home prices and high rents (which can make saving more difficult). There are many options available for buyers making a smaller down payment and – because of historically low interest rates and rising housing prices – getting into a home sooner rather than later can be the more prudent move.
Additionally, there are a number of federal, state, and local programs aimed at first-time homebuyers that allow mortgages with as little as 3 percent down – or even no money down for many VA loan options.
Help is Out There
Some aspiring first-time homebuyers might not realize there are also an array of down payment assistance programs (DPA) available throughout the U.S. Some might be government programs but others, which are usually centered on a low- or no-interest second mortgage that requires no minimum payment, can be private. If you stay in the home for a period of time (usually 5 to 7 years), the second will be forgiven. Others come in the form of grants, which, if all criteria are met, shouldn’t require repayment.
There are unique programs too. For instance, many states offer DPA for “community heroes,” such as first responders, educators and health-care workers. Others target recent college graduates, or those who wish to live in an area selected for rehabilitation.
Mortgage Insurance
In most cases, when you put less than 20% down, you will be required to pay private mortgage insurance (PMI), but this is often a solid investment, as you will begin accruing equity immediately. Once you’ve paid down your principal enough or your equity has risen to the point that you reach a 20% loan-to-value threshold, you can have PMI removed. In many cases, you can request to have it removed without it affecting your loan, but some loan programs require a refinance to get it removed.
The insurance premium varies but typically runs between 0.5 percent and 1.0 percent of the loan balance, depending on the strength of your credit score, and some of the low-down payment programs waive PMI under certain circumstances.
Know Your Options
Knowing what works best for you and your situation is the key factor in deciding how much money to put down. Start by looking at the numbers in a mortgage payment calculator, then your Loan Officer can talk you through the different options available and crunch actual numbers to help you make the most of your savings and get you moving toward your homeownership goals.
Be sure to check our resources on which first time home buyers grant and first time home buyer program(s) are available in your area.