Plenty of people, current homeowners included, think they need a 20 percent down payment in order to buy a home. In all honesty, there are a lot of advantages to putting down more money - better rates, lower mortgage payments, and more equity when you move in.
But is 20 percent down required? Not necessarily. Not having tens of thousands of dollars saved doesn’t mean you can’t buy a home of your own. Every situation and every lender is different, but you have more mortgage and down payment options than you realize.
Zero Percent Down
If you’re active duty military, retired military, or the spouse of either, you’re eligible for a VA loan - a zero dollar down payment mortgage. Reservists and National Guard members who have been in for six years or longer are eligible, too. You won’t pay a down payment or mortgage insurance, and you’re not automatically disqualified for less-than-great credit. You’ll want to talk to a lender who offers VA loans as there can be rules and restrictions for how it’s used but for the buyer who has access to it, zero money down is a good deal.
3.5 Percent Down
If you get a FHA loan, you can potentially qualify for a loan that only requires a 3.5 percent down payment. These loans are insured by the Federal Housing Administration (FHA). First time home buyers and those with less than great credit scores often take advantage of FHA loan programs. You must use a FHA-approved lender but many lenders are, which lets you shop around for a good rate. One downside to a FHA loan is that you must pay mortgage insurance for the life of the loan. The total amount you pay depends on the length of your loan and how much equity you have.
Conventional loans are now offering their own three and 3.5 percent down payment mortgages. Only the best credit risks will likely qualify for these loans, and not all lenders offer them. It’s worth the time to shop around, especially if you’ve got excellent credit but only a small savings account.
Five Percent and Higher
Every lender offers their own loan programs with lower down payment options. Some mortgage companies might offer zero down, but these are still very rare. Mortgages with lower down payments often have strict credit requirements so not everyone will qualify. One downside of smaller down payments is that private mortgage insurance (PMI) is typically required until the loan-to-value (LTV) of your mortgage reaches 80 percent. Anyone in the market for condos or jumbo loans ($450,800 in the Naples area) may be required to make a higher down payment, depending on the terms of the loans available.
Make a Larger Down Payment if You Can Afford It
The good news, for most buyers, is that with decent credit (580 and up for FHA loans), you can buy a home with less than 20 percent down. You don’t have to wait years to save up. Plenty of buyers with great credit are able to own a home with very little paid out of pocket. If you can, though, pay as much down on your home purchase as you can afford. You’ll affect the terms of your mortgage and your financial health when you do.
- You won’t have to pay private mortgage insurance.
- Your interest rate will likely be lower - saving you thousands over the life of the loan.
- You may walk into your home with equity already built-in which means your home is worth more than you owe.
Not every loan product is right for every buyer. To find out what is best for your financial situation, talk to a mortgage lender. Once you know what your options are, get pre-approved for the mortgage with the best down payment for your situation. When you’re ready to look for a new home to buy, bring me your pre-approval letter and I’ll help you find the best house that fits your budget. Your pre-approval letter will also let sellers know you’re a serious buyer which means they’ll pay closer attention to your offer.
Already pre-approved? Ready to buy? Let’s talk!