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Mortgage Guide

How to get a home loan

Having to make a 20% down payment on your home is a myth


Many home buyers are under the impression you have to make a 20% down payment when you buy your home - or else. In reality, not everyone has that much capital to invest in their home right away.

But there’s good news - you don’t have to keep renting and saving for a 20% down payment. You have options.

Before we run through your options, let’s get a clearer understanding of where the 20% down payment myth comes from and why many people make that their goal.

The higher the down payment, the lower your interest rate.

Plain and simple. Your down payment is the initial investment on your home. The more you invest early, the lower your interest rate will be, which lowers your monthly mortgage payment. In addition, when you put down 20% or more, you don’t have to purchase private mortgage insurance.  

 

What happens when you pay less than 20%?

When you make a lower down payment, you pay a higher interest rate. In addition, you will be required to purchase private mortgage insurance if you put less than 20% down. Both these factors increase your monthly mortgage payment. Keep in mind, you can get rid of mortgage insurance down the road. Down payment is the borrower’s skin in the game. This is their portion of risk on the loan.

 

What’s the lowest down payment you can make?

There are multiple loan programs with low down payment options. If you qualify, there are loans that offer down payments of $0, $100, 3%, 3.5%, 5%, and 10%.

To qualify for these loans, there are some rules. For example, to qualify for one of the zero down payment options with a USDA loan, the subject property must be located in a certain area.

For the 3.5% down payment program with FHA, not all condos are FHA eligible and single family home must pass an FHA inspection. In addition, there are other factors such as credit and max loan amounts for these type of programs. But it’s good to know you have options. If you’re curious what loans you qualify for, schedule a quick 15-minute call to chat.

 

Outside the box thinking - how to allocate more money for down payment?

Before you tap into long-term investments like your 401k, you should consider lender credit, seller credit, or a gift.

If you choose to use lender credit you will have slightly higher interest rates. But on the bright side, the lender will offset some closing costs.

Sometimes the seller of the home will provide seller credit. The maximum seller credit is 6% of the purchase price. This will also minimize your closing costs.

In addition, some loan programs allow you to use a gift or down payment assistance programs.  With less closing cost fees, you can apply more money towards your down payment.

 

One more consideration.

You can also take the 5% down payment option and make additional payments on the loan when the time is right. This is a variable you control.

Also, keep in mind how long will you be living in this home. Most people don’t stay in the same home 2 or 3 decades.

If you’re thinking about buying a house and want to know what your options are, feel free to run some numbers through our mortgage calculator. After that, give us a call at 855-610-1112 to see how we can figure out what works best for your specific situation.

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