Nowadays, if you ask potential home buyers what intimidates them the most when it comes to purchasing a house, it’s not the monthly payment – it’s having to come up with a sizable down payment. But today, buyers have way more down payment options to choose from than ever before.
Even though most buyers are earning good incomes, yesterday’s standard of 20% down is out of reach. Thanks to things like student debt and high rent prices, people are just unable to put that kind of money away for a down payment on a home. But that doesn’t mean that buying a home is off limits.
With a little research about the down payment options available now, you might find that you’re closer to your dream home than you’ve ever dreamed. (But you don’t have to do that research alone. Just read on…)
Myth: You have to have a 20% down payment
Yes, putting a 20% down payment used to be the norm for all home buyers. In today’s market, that old standard could be not only impossible, but also unnecessary.
According to the latest Zillow report, coming up with a 20% down payment requires more than two-thirds of the average person’s annual income. Yes, putting down 20% down has it’s upsides. It’ll help you avoid mortgage insurance, possibly get you a lower interest rate, and definitely will give you an immediate equity boost. However, if you have to go to extremes to scrounge up that 20% — like cashing out your 401k — those benefits are far outweighed by the risks you’re taking. And if you manage to save for that 20% over time, mortgage fees and interest rates could go up before you’re finally ready to buy, increasing the total cost of your purchase.
Truth: Home loans are no longer one-size-fits-all
While some might choose to stick to the old 20% rule, the truth is that today’s home buyers have more choices. Home loans requiring a low down payment, offered by both big and small lenders, are only continuing to grow in popularity – especially with Millennial’s. These loans are helping more first-time home buyers and other qualified borrowers jump into the market, without totally depleting their savings.
The 3 best down payment options available today…
3% Down Options
- HomeReady – This mortgage, which is backed by Fannie Mae and available from nearly every U.S. lender, offers below market mortgage rates and reduced mortgage insurance costs. The combined income of everyone living in the home can be used to get a mortgage qualified and approved. That includes the “boarder income flexibilities” option — using income from a roommate to help you qualify.
- Home Possible – This mortgage, which is backed by Freddie Mac, is similar to HomeReady in that it also offers reduced mortgage insurance and low mortgage rates. What makes Home Possible unique is that it allows for the entire down payment to come from a financial gift (e.g via a family member or eligible nonprofit), or from a second mortgage that can also be used to cover closing costs.
- Conventional 97 – This mortgage program, available from Fannie Mae and Freddie Mac, is a less-expensive option compared to an FHA loan for many home buyers. It allows for the entire down payment to come from gifted funds — as long as the gifter is related by blood, marriage, legal guardianship, domestic partnership, or is a fiance/fiancee. One thing to note — there’s a ceiling here. Loans under the program cannot exceed $424,100. If you’re in a less pricey housing marketing, this could be a great fit. But if you’re in one of the more competitive housing markets, this might not be the best option for you.
FHA 3.5% Down
The FHA 3.5% option is unique because the FHA is actually the insurer of the loan, rather than the lender. This gets a little complicated, but stick with me here. The FHA publishes a series of standards for the loans it will insure. When a bank underwrites and funds a loan which meets these specific guidelines, the FHA agrees to insure that loan against loss. This mortgage is available nationwide. And like some 3% down options, it allows for down payments to consist entirely of “gifted funds.” Requirements for this loan include: a credit score of 580 and mortgage insurance premiums to be paid upfront at closing.
Down Payment Assistance
There are non-profit and and government funds available to assist some buyer’s with a portion or all of their down payment and closing costs. These DPA funds are used in conjunction with a Conventional or FHA loan. The assistance can come in a couple of different forms: 1) A true grant that does not have to be paid back. 2) A forgivable grant where the repayment is prorated over a certain time period. The down payment assistance can be as high as 7% of the loan amount. These programs are not available to everyone so you will want to consult with a loan officer to see if you qualify.
Which Loan Is Best for You?
With all the of new loan options and different financial circumstances, the 20% down rule is being put to the test. In the end, it’s best to make sure to fully explore all possible loan options available to you before deciding on the down payment amount and loan type that suits you and your situation best.
Interested in finding out which type of loan is best for you? Submit a pre-approval request to have an experienced Loan Consultant review your loan options.