What Homebuyers Need to Know About the Down Payment
One of the largest obstacles stopping people who want to be homeowners from buying a house is the need to come up with a down payment. The thought of saving tens of thousands of dollars before being able to purchase seems like an overwhelming task to many people.
However, there are other down payment options and knowing the ins and outs will help you, as a buyer, know when you can afford to buy.
20% Down Payment
Chances are you have heard that most lenders require a 20% down payment, and there is some truth to that. Lenders prefer for buyers to be able to make a 20% down payment. This makes them believe that the buyer will be less likely to default on the mortgage because they have money invested into the property as well.
The earlier you start to save up to make a down payment the better it will be for you in the long run. A survey by NerdWallet found that the average person spent three years saving up money for a down payment before being able to buy.
Private Mortgage Insurance
If it seems impossible to make a 20% down payment, don’t worry, you have other options. It is still possible to be approved for a conventional loan if you have at least a 10% down payment. The catch is you will be required to pay for Private Mortgage Insurance (PMI) until you have 20% equity in your home.
The cost of PMI will only be up to 1.15% of your loan, but no matter how small the interest, it still increases your payment requirements. If you wind up having to pay PMI on your mortgage, make sure you are watching your loan balance. When you reach 22% equity in your home, your lender is required to drop your PMI, so it is your responsibility to watch for it to hit that 20% mark. When this happens you can contact your lender and request them to drop the PMI.
When You Still Don’t Have Enough
While the option of having PMI on a conventional loan is a nice idea, many buyers still aren’t able to come up with a 10% down payment; this does not mean that you are unable to buy. There are thousands of programs across the country that help buyers with down payment assistance. Some of these programs come with income limitations, but there are many programs that are easy to apply to and more flexible.
The Federal Housing Administration provides loans that only require a 3.5% down payment, as well as special assistance programs for veterans and active duty military. These loans do come with credit score minimums, 500 for FHA loans and 620 minimum for VA mortgage loans.
If you are interested in seeing what down payment assistance programs apply to your situation, check with the Department of Housing and Urban Development. Do not assume that you will not qualify for assistance until you check all your options.
If you are ready to become a homeowner do not let the lack of a down payment stand in your way. Investigate the many options that are available on the market to see what programs you can apply for. If you think you will want to purchase in the future, start saving now to put yourself in the best home buying situation possible.