Home Loans and Down Payments
Your home is one of the most expensive purchases you will make and down payments are the one challenge that most home buyers think of when looking at finding a good mortgage or loan. t is often said that 20% is the magic number for home ownership and that to obtain a mortgage a buyer must put at least this amount down.
In reality, most home buyers do not have a 20% lump sum down payment and the actual figure ranges from 3-20% of the sale price of the home when taking out a 30year fixed mortgage. This is the most commonly obtained type of home buying loan in the US. However, you can find loans where you need no down payment. Veterans Affairs (VA) and the Department of Agriculture (USDA) both operate loan programs where this is the case.
The down payment combines with your mortgage to cover the cost of the home. It is a sum of money that has to be provided by the home buyer upfront for the sale to go ahead. It will be used, with your credit score and other financial information, to determine how much your home loan will be.
There are calculators online to help you decide how much you can safely afford to buy which takes into account your debts, interest rates, loan terms and a number of other personal factors. You can click here to access one of these which can give you a reasonably accurate result.
Why Do People Still Say 20% is Ideal?
A 20% down payment means that you can take advantage of some money-saving benefits. For example, with a 20% down payment, you are likely to get a lower interest rate and you probably won’t have to take out any private mortgage insurance.
This in itself can save many thousands of dollars in the loan’s lifetime. Additionally, your equity will increase and mortgage payments reduce more rapidly. In some cases, sellers will favor a home buyer who can put a good down payment on the table especially if there is a lot of competition for the property.
Some home buyers will happily pay 20% and some pay even more especially in the western and northeastern states where down payments of around 47% and 52% respectively are not unusual. This relates directly to the increased competition for homes in those regions.
Finding Down Payments Can Be A Challenge
Around 29% of home buyers find it tough to come up with their down payment and even those that manage to put down over 20% admit that it is a challenge.
Most of the home buyers surveyed say that they raised their down payment by saving but around 24% use different sources to get the cash together.
For example, some home buyers set aside gifts from family, sell existing financial products like company shares or investment, use retirement funds or ask a family member for a loan.
For buyers who are selling a property finding a down payment can be easier if they can use any leftover money from the sale. These buyers often put down a larger down payment but for first-time buyers, the usual amount ranges from 3-9% with only 27% of first-time homeowners being able to pay 20% of the sale price or over.
Not all Mortgage Loans are Created Equal
It always pays to shop around for your mortgage when looking to buy a home. Not only do mortgage rates and repayments vary but different companies will offer different services for clients who have trouble finding the full 20% down payment.
Your Realtor should be able to give you some useful advice regarding loan companies that you may wish to approach, or you can try one of the many useful comparison websites.
When looking at a loan company always check what their upfront costs are for setting up the loan as these can be substantial in some cases. If the cost of taking up the loan reduces the amount of down payment funding it could be that you end up paying a higher interest rate than you would if you went to a different loan company.
Getting a Loan with a Down Payment Under 20%
Having a low percentage or even zero down payment is a challenge when looking for a house loan and mortgage lenders often apply very strict criteria. However, some of the government-backed loans offer the opportunity to buy with low down payments which can provide affordable for some home buyers.
These include the Federal Housing Administration Loan which will let buyers put down a payment of just 3.5%, however, the home buyer then has to pay for private mortgage insurance in order to protect the lender’s investment should you fail to make payments.
There are two Fannie Mae loans currently proving popular among home buyers and both accept low down payments of 3%:
- The Conventional 97 mortgage is good for buyers with a healthy credit score but who are having problems gathering the funds for their down payment. This is only available where at least one of the home buyers are buying a property for the first time.
- The Home Ready mortgage is also available to home buyers with good credit who are on a low to moderate-income. If buyers belong to certain demographic groups or are looking for homes in certain areas the Home Ready mortgage provides a great opportunity to buy a first home.
- Fannie Mae has recently announced that they are waiving the $75 fee for the home ownership education program which is a prerequisite of Home Ready loan.
It is also worth looking at other assistance programs on a local and state level that help people to buy homes when they have a low down payment. There are other incentives including free lots of building land and student loan forgiveness.
These will not cover a down payment but they will free up funds from elsewhere increasing the chances of a more substantial down payment.