You Don’t Need A 20% Down Payment, But It Helps

The official start of spring is around the corner, which means home sales are going to start picking up even more. Traditionally, the warmer months is when more homeowners sell their homes and when buyers buy more homes. The heat picks up in spring and comes to a full boil in summer. If you are like one of the many Americans who has been considering buying a home over the past year, then it is important to think about down payments. When it comes to mortgages and down payments, there are a lot of misconceptions. Many are under the assumption that you have to have 20% for a down payment in order to qualify for a mortgage. This is not true. There are a lot of mortgage programs where you do not need a 20% down payment. However, while you don’t need a 20% down payment, it is helpful. 

You Do Not Need a 20% Down Payment

If you do not have 20% of the cost of a home for a down payment, you are not excluded from getting a mortgage. There are a lot of loan programs that allow you to put much less than 20% down for a home loan. 

First time home buyers might qualify for FHA loans. These mortgages are backed by the federal government and allow individuals with less than perfect credit or smaller down payments to buy homes. If you qualify for a FHA loan, then you can get accessed to reduced down payments ranging from 3.5% to 10%. The 10% down payment is for anyone who has a credit score between 500 and 579. The 3.5% is for anyone with a credit score of 580 or above. 

Those with military service might qualify for another federally backed mortgage program, VA loans. For those who can get VA loans, you are not required to have a down payment for your mortgage. Additionally, VA loans do not have any credit score requirements. These are an excellent way to get your foot into the door of homeownership even if you do not meet the requirements of traditional mortgages.

Finally, USDA loans are another type of government backed mortgage that gives you an option with no down payment requirements. If you are considering buying a home in a rural area and do not qualify for a traditional mortgage, USDA loans are perfect. Not all properties can qualify for a USDA loan, so it is important to check with your mortgage broker. 

Government programs are not the only loan options that require less than a 20% down payment. Every lender is different and has their own sets of requirements for mortgage qualification. The benefit of working with a professional, independent mortgage broker like the team at Peoples Choice Mortgage is getting access to lots of loan options. We work with hundreds of lenders with their own unique products and qualification requirements. This gives us a much better chance of finding something that works for your needs and your financial situation. 

The Benefits of 20% Down Payments

Although it is possible to get a mortgage without a 20% down payment, there are tremendous benefits to them. One of the most obvious benefits is that being able to make a larger down payment gets you access to more favorable mortgage rates. For the first time since July of last year, mortgage rates creeped above 3%. While these are not the historic lows that we have enjoyed for nearly a year, they are still incredible. Unfortunately, putting down a smaller payment probably will not get you access to the absolute bottom scale of mortgage rates. The smaller of a down payment you put down, the more of a risk the lender is taking on. Lenders will increase the mortgage rate to offset the increased risk of the larger mortgage. 

Another tremendous benefit of making a larger down payment is that you will pay less for your home over the life of your loan. The larger the principal is on your mortgage, the more you will pay in interest. A larger down payment on the frontend of your mortgage can save you significant money on the backend. It will also mean that you have smaller monthly payments. 

An additional benefit to a down payment of at least 20% is not having to pay Personal Mortgage Insurance (PMI). Lenders require borrowers to take out PMI on any loan that pays less than 20% for a down payment. PMI pays the lender in the event that you end up defaulting on your mortgage. The premium for PMI is added into your monthly mortgage payment and needs to be accounted for in your budget if you plan to make a smaller down payment. The good news is that once you have paid off 20% of your mortgage, you can get rid of PMI, which will decrease your monthly payments. 

Final Thoughts

There are tangible benefits to being able to put up a 20% down payment on a mortgage for a new home purchase. However, you should not think that you absolutely need to wait until you have a large down payment in order to buy a home. The logic that you need financial wealth before you buy a home is backwards. Oftentimes, buying a home is the first step to achieving true financial wealth. Assuming your budget allows you to make your mortgage payments each month and on time, it makes sense to buy a home even if you only have a small down payment. 

Many of the benefits of making a larger down payment can still be garnered down the road, as long as you make your payments and make them on time. PMI is removed after you pay off 20% of your loan. Rates can be reduced at later dates through refinancing your mortgage. You can still save money over the life of your loan by making larger payments once you no longer have PMI. 

The important thing is to take advantage of today’s red hot real estate market and buy a home while you can. Mortgage rates will only go higher and so will home prices. Making the decision to delay buying a home can end up costing you a lot more in the long run. If you are considering buying a home and do not want to miss out on today’s favorable environment, contact us! We will give you a no-obligation, complimentary qualification assessment and walk you through the ins-and-outs of the mortgage programs that work for you.