A common misconception today with both experienced and new home buyers is that you’ll need a full 20% down payment to buy a home. This is not at all the case. Here are some options in today’s market for a smaller down payment.
- Conventional loans allow for as little as 5% of the sales price as a down payment. These can often be gift funds from family or sometimes even borrowed from another source (retirement accounts are a popular option). Keep in mind that with a smaller down payment on a conventional loan (less than the old standard of 20%) there will be a small private mortgage insurance premium added to your monthly payment. This PMI can be paid in two ways: A). with a small amount added to your payment each month (traditional method) or B). using a very slightly higher interest rate (lender paid method).
- FHA loans allow for as little as 3.5% of the sales price as a down payment. These can also be a gift from family or sometimes borrowed from another source. In general FHA loans have a little less stringent underwriting requirements (maybe a lower credit score or higher debt ratio) but they do carry a slightly higher monthly mortgage insurance premium. Often times it is advised to use a conventional loan in place of FHA if possible. Also, contrary to popular belief you don’t have to be a first time home buyer to use an FHA loan. Some properties are offered for sale by HUD (previous FHA foreclosed properties) with as little as $100 down down payment requirements. Ask your realtor for information on any properties available with this feature in your market.
- VA (Veteran Administration) loans offer financing with as little as 0% down payments. These are popular options to consider if you have eligibility as a veteran to use the program. Just like FHA they generally are a little more flexible with underwriting requirements.
- USDA (United States Department of Agriculture) also offers 0% down payment loans. There are some more stringent underwriting requirements than FHA and VA as far as credit score and debt ratio as well as requirements for where the property is located. Properties must be in a “rural” area as defined by the USDA, hence the alternate name for this product of Rural Development (RD) loans. Incomes also must be below the county standard as defined by USDA.
Considering that all of the above programs also allow the seller to pay a buyer’s closing costs a minimal down payment can generally be structured that works for most buyers in today’s market.
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