Many people think that 20 percent is the magic number when it comes to a down payment on a home and that there is no other way to get it done. This thought can lead to people just giving up. After all, on even a modest 200,000 dollar home, 20 percent is 40,000 dollars. Almost nobody has this kind of money and the prospect of saving it is daunting. If you save 500 dollars a month, it would take you almost 7 years to have enough money.
Do you really need 20 percent down though? Sure, it makes things easier but it is not a must have. Having that amount to put down is definitely a plus. It will allow you to avoid private mortgage insurance altogether and can get you the very best rates, provided your credit is good.
There are a lot of ways around having a huge deposit though and you can even get a home approval with absolutely nothing down. Here are some programs to look at.
Zero Down Home Loans
How does putting absolutely nothing down sound? Does it seem too good to be true? It is not, in fact there are two great government programs that can get it done. Here they are.
USDA Home Loans
You do not have to live out in the country to get a USDA loan. In fact, the vast majority of the land in the US is classified as rural and will qualify you for one of these loans. You might not be able to live downtown, but in most cities, you can be about thirty minutes from it.
This is a true zero down home loan program and all you have to do is have a 640 credit score and meet income requirements.
The catch with a USDA loan is that there will be up front and annual mortgage insurance. It can add several hundred dollars to your mortgage payment but the loan can get you in a home.
VA Home Loans
If you meet the military service requirements, this is an incredible loan.
With a score of about 620 and zero down, you can get an approval. Unlike a USDA loan, there is no restriction on where you buy your home but it must be your primary residence.
The greatest thing about VA loans is that there is no requirement for mortgage insurance. That alone will save you more than 200 dollars on an average mortgage.
Low Down Payment Programs
If you do not meet the requirements for the programs above, you may still be in luck. With as little as 3.5 percent down, you can get into your home. Here is how.
Not only can an FHA loan get you in with as little as 3.5 percent, it also has less stringent credit requirements. If you have at least a 580, you may be able to qualify. You can even get approved for a loan with bad credit scores as low as 500 but the deposit required would increase to 10 percent.
There is no location requirement for an FHA loan but it must be your primary residence.
In addition, there will be mortgage insurance to pay. You will have both an up front payment and an annual payment. Currently the up front is 1.75 percent and the annual is .85 percent.
If you can manage a 10 percent down payment, this is another great option. It involves putting 10 percent down and essentially having two mortgages. One for 80 percent of the value and a smaller one for 10 percent.
The benefit to the 80-10-10 is that it allows you to bypass mortgage insurance which can save you a substantial amount of money. The downside is the complexity. You are getting two loans, often from separate lenders which can make an already complicated process even more so. Still, the financial benefits make it well worth pursuing.
Low Down Payment Issues
It is great paying little down on a home but there are some problems that come with it. If you can pay the recommended 20 percent down, you should by all means do so. If not, just to wrap things up, here are the issues you will need to deal with. None of them should really stop you from pursuing a home with a smaller down payment.
Mortgage Insurance Requirement
This is by far the biggest disadvantage to buying a home with a smaller down payment. Luckily, you can get rid of the mortgage insurance once you have reached an equity of at least 20 percent.
Unfortunately, this will generally require refinancing the home in the future to get the mortgage insurance removed. It used to be that it automatically dropped from FHA when you had enough equity but this is no longer the case, unless you put over 10 percent down on FHA. Even then, it would still stay on for 11 years.
Higher Interest Rates
Everything else being equal, if you come to the table with less money down, you will get a lower interest rate. This is probably not going to result in a huge difference but it is worth noting. On an average 200,000 dollar home, a rate that is .25 percent higher will cost you about $30 a month. That is only 400 dollars a year.
Tina’s Last Word
There is really no good reason to wait to save up the 20 percent needed for a conventional home loan. Sure, if you expect a windfall in the next year, wait. If you are like most people and it would take 4 years or more to save that big of a deposit, look into one of the zero or low down payment home loans. Even with added mortgage insurance, you would most likely come out on top over wasting money on rent. You can always refinance your home when you get enough equity.