How Much Down Payment Do You Need?
One of the most difficult and misunderstood aspects of buying a home is the question of how much down payment is needed. A common misconception among buyers is that 20% of the purchase price of the home is the required minimum down payment. Such a large amount can be discouraging for many buyers, especially in markets where homes are appreciating rapidly and the buyer’s savings rate has no chance of keeping up with the price of the home.
Down Payment Requirements May be Less than You Think
Fortunately, there is really good news when it comes to how much money a buyer needs to purchase a property. Both of the two major sources for home loans have programs that accommodate very low down payments so that buyers can use as little as 3.0%-3.5% of the purchase price of a home to qualify for a home loan. As an example, if the purchase price of the home is $200,000.00, the minimum required down payment is almost all cases is just $6,000.00 to $7,000.00.
Even better news is that 100% of the down payment funds can be gifted to potential buyers by direct family members like parents or siblings. For those struggling to save enough money to purchase a home, it can be a huge advantage to get a little help from family.
Down Payment Assistance Programs
It’s also possible to use state a local Down Payment Assistance programs that use grants or loans to help borrowers obtain a down payment. In this case, it is common for a buyer to invest as little as $1,000.00 to purchase their home. In most states and local municipalities, there are various entities and organizations that can provide assistance along these lines but the rules, terms and participating organizations change regularly. Good lenders work hard to stay up on the rules and can help you determine which DPA (Down Payment Assistance) program is right for you. Note that DPAs generally carry higher rates and fees and often have requirements for class attendance and income restrictions. For that reason, we typically recommend exhausting every effort to obtain more traditional types of loans with 3%-3.5% down before considering a Down Payment Assistance program.
Mortgage Insurance Requirements
It’s worth considering that anytime a borrower puts down less than 20% of the purchase price of a home, they are going to need “Mortgage Insurance” in some form. See our separate post on that topic to learn more about what mortgage insurance is and how best to navigate it for you. While mortgage insurance (MI) is very often given a bad name in the marketplace, it is actually a powerful tool that borrowers can use to own a home. For a small monthly fee, which is used to pay the premium on an insurance policy, the borrower is not required to save 20% of the purchase price of the home. This is a huge advantage given the high price of homes in most major cities in the US. In many cases, after a short period of time, usually two to five years, a borrower will have amassed enough equity in the property to remove the mortgage insurance by either refinancing or canceling the policy where rules allow.
As with most decisions in the lending world, you’ll need a good Mortgage Banker to help you determine which options are available to you and what strategy is best.
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