For many first-time buyers, saving for a down payment is often the most challenging hurdle they face on the path to home ownership. Most of these first-time buyers assume they must put down 20% of the purchase price.
That’s some heavy coin! But the truth is – you don’t have to put 20% down to buy a home. There are low down payment mortgage programs designed to help you overcome this big hurdle.
The question is – should you buy if you can’t put 20% down?
Unfortunately, the answer isn’t cut and dried. Whether or not it’s a good decision to buy with less down really depends on your situation. Here are some facts to consider as you decide what’s right for you:
FHA loans allow you to put down as little as 3%. Backed by the Federal Housing Administration (FHA), these low down payment programs were designed to help low-income prospective buyers achieve the dream of home ownership.
Private Mortgage Insurance (PMI) is a monthly expense in addition to your monthly mortgage payment. When you take out a mortgage, the home you buy is your collateral in the event you default. With a conventional mortgage, the 20% down protects the lender, giving them a better opportunity to recoup their losses. If you don’t put 20% down, lenders require you to carry PMI. Unlike your homeowner’s insurance that protects you in the event of a natural disaster, PMI protects the lender in the event you default.
With an FHA loan, the only way to get rid of PMI is to refinance. With a conventional loan, your PMI automatically falls off once you’ve built up 20% of the value in your home. With an FHA loan, the only way to get rid of your monthly PMI payment is to refinance.
VA loans allow you to put 0% down without paying PMI. This amazing loan program is available to the men and women who served and are serving our country. For those who are eligible, this can be an incredible way to avoid the down payment hurdle altogether.
Low down payment programs have “limits” on the amount you can borrow. The low down payment programs are made possible because government entities back the loans. Examples are the Department of Veterans Affairs (VA) and the Federal Housing Administration (FHA). Borrowers have to meet the strict qualifications outlined by the VA and FHA. So too must the homes they are purchasing. The VA and FHA have set aka limits on how big a loan they will back. For some borrowers, these “limits” price them out of the market as homes sell for much more than the sum for which they qualify.
Ultimately, the right decision for you comes down to cost. The higher the market price on a home, the more likely you’ll want to save until you have a full 20% to put down.
Ready to explore your options? Give me a call!