Don’t Be Intimidated By Down Payments

There is a common misconception that you need a 20% down payment in order to buy a house. The truth is that many home buyers qualify for a mortgage with much smaller down payments. For many potential home buyers, saving up for a down payment is the biggest mental hurdle to actually owning a home. However, when you look at the various mortgage options available and the size of a down payment you would need, it is more achievable than you think. The team at Peoples Choice Mortgage is here to discuss the truth about down payments and the timeframe you need to save up for one. 

Not All Mortgages Require a 20% Down Payment

The simple truth is that not all mortgages require home buyers to have a 20% down payment in order to qualify. Every lender has different lending requirements. On top of that, there are many loan programs that exist specifically to help home buyers who do not have a 20% down payment. 

FHA loans are a special loan program backed by the Federal Housing Administration to make it easier for first time home buyers to get a mortgage. These loans do not require applicants to have a 20% down payment. Depending on your credit score, you might be able to qualify for a FHA loan with a 10% down payment or a 3.5% down payment. If you have a FICO score above 580, then you might be able to get a 3.5% down payment. Less than 580 and you could still be in the running for 10%. 

VA loans are another loan program that requires significantly smaller down payments than 20%. This program was created by the U.S. Department of Veterans Affairs to help armed service members and their spouses become homeowners. If you are able to qualify for a VA loan, then you might not need a down payment at all. 

USDA loans are another mortgage program backed by the federal government that require less than a 20% down payment. USDA loans were created by the U.S. Department of Agriculture to help boost rural economies. You might be able to qualify for a USDA loan if you are interested in buying a home in a rural area. If you do qualify, then you would not need a down payment at all. 

Aside from these federal government programs, many states and cities have their own programs, especially for first time home buyers. In Massachusetts, for example, there are a number of programs for first time home buyers that will provide down payment assistance.  These programs can provide you with up to $15,000 or 3% of your down payment. Many states and localities have programs that are very similar. 

Saving Up for Down Payments to Buy a House

Now that we are clear that there are a lot of different mortgage types and special programs that require less than a 20% down payment, it is time to talk about saving for one. Saving up for a down payment is an excellent budgetary exercise. It gets you in the habit of making sure you are able to set aside a consistent amount of money each month, like you would need for a mortgage payment. 

A basic rule of finance regarding mortgage payments is that you should not pay more than 28% of your monthly budget on your housing. As is the case, to save up for your down payment you save the difference between your rent and whatever 28% of your monthly budget is. If you are able to do more, then that is great. However, if you follow at least this formula it is possible to make some predictions about how long it will take you to save for a down payment. Using data provided by the U.S. Department of Urban Housing and Development, you can get a rough estimate of how long it takes to save for a down payment. Mind you, the time you need to save for a down payment depends on how much homes cost in your market. The timeline is longer in Massachusetts than in Michigan. 

Let’s use this data to compare timelines for a 10% down payment versus a 3% down payment. Remember, most home buyers do not need a 20% down payment to qualify for a mortgage. There are many different lenders and many mortgage options that require far less. Based on the data above, it would take you 4.02 years to save for a 10% down payment in Massachusetts versus 2.17 in Michigan. Mind you, this time can be cut down significantly by qualifying for a down payment assistance program or by devoting more of your monthly budget. For a 3% down payment, it would take 1.21 years in Massachusetts and only 0.65 years in Michigan. These numbers are astounding. In a world where you only need a 3% down payment, it might take you less than a year to save for a down payment. 

Final Thoughts

If you have a dream of owning a home, then you should not self select yourself out of buying one merely because you are intimidated by a down payment. At Peoples Choice Mortgage, we work with hundreds of lenders who have a number of different mortgage options. You should not assume that you need a 20% down payment and you should not assume that saving for one is out of your grasp. The simple truth is that buying a home is a life-changing experience and it is worth talking to a mortgage professional to see how close you are to making it happen.

If you have any desire to buy a home, you should contact us. We can give you a complimentary, no-obligation mortgage qualifier to see where you stand right now. You might not be in a position to qualify for a mortgage today, but knowing how close you are can help you plan to qualify in the future.