A home is a huge and complicated purchase. Anyone will tell you that. But most people will never agree on how much a down payment should be. Nowadays, people are buying homes with little or even no down payments. There are loans and programs in every state to assist people in getting a home if they want to even if they haven’t saved much.
Conventional thoughts in the past have always been to put down 20 percent or even more if you can. Well, sometimes that wipes out your savings and even depletes your stock and investment accounts.
You have nothing left over for furniture, unexpected expenses like a broken water heater or your retirement fund.
“I’ve been in this business for 30 years. Having 20 percent down is just one of those myths about lending that is out there,” says Jill Hoogendyk, branch manager and mortgage expert at Prospect Mortgage, Phoenix. “Things are always changing. The only reason people usually put down 20 percent is to get out of private mortgage insurance. But we’ve always had loans with 5 percent down.”
Down payments can be a very personal decision, depending if you want a lower monthly payment, you don’t want to pay private mortgage insurance or you just want to get done paying for your house quicker. But whatever you want, there is a loan out there for you with just the right down payment requirement.
And just to make things even easier, a recent analysis by the Down Payment Resource and RealtyTrac found that 87 percent of the single family homes and condos in the U.S. would qualify for a down payment assistance program available in the county where they are located. The average amount of down payment assistance across all counties is $11,565. More than 2,000 counties have more than 10 down payment programs available to prospective homebuyers.
Loan Programs and Downpayment Requirements
Here is a look at the different loans available and their down payment options and requirements:
Conventional Loan Downpayments
You can get a mortgage through a lender that approves loans based on Fannie Mae and Freddie Mac rules – which is most lenders – with as little as 3 percent down. You must have a credit score of at least 620 and offer complete documentation of your funds, job, assets and credit history. By getting a conventional loan, you can avoid the higher-priced FHA loan mortgage insurance which continues the entire length of the loan. With conventional loans, the mortgage insurance stops after accumulating 20 percent equity, Hoogendyk says.
Three percent down payment conventional loans are out there. A new change to these loans that just came out last year was that your down payment can be a 100 percent gift from a blood relative or a community type program. Before, it had to be the borrowers’ money, she says.
“Of course, you have to meet the criteria with a low to median income. Just remember that the less you put down, the more you will be paying and the higher the interest rate. Conventional loans are very credit score driven. A 3 percent conventional loan will have much more rigid standards than FHA standards,” she says.
With any mortgage, including a conventional loan, you will run into other expenses that add up to the price of buying a home. Hoogendyk says that the addition of closing costs, the appraisal, the credit report cost, first year of insurance, taxes and inspection will cost about 2 percent of the entire purchase price. A conventional loan appraisal will run about $470 in her area, while an FHA appraisal which has a few more requirements, is $490. A home inspection which includes pest inspection can run from $350 to $450.
For a FHA mortgage, you need a minimum of 3.5 percent. That money can be gifted, too, by a relative or through a down payment assistance program. An FHA mortgage is insured by the federal government, but not offered directly by the government. FHA-approved lenders, rather, offer loans based on FHA rules.
FHA mortgages have loan limits depending on where you live in the country. The limits have not changed since last year. And FHA loans require a one-time upfront mortgage insurance fee plus mortgage insurance throughout the length of the loan or until the borrower refinances. The upfront fee can be financed into the loan.
VA Home Loan Down Payment Requirements
This is a zero down payment mortgage, with loan limits based on geographic area, just like the FHA loans. Borrowers’ eligibility is based on their service – such as whether they were reservists or full military, says Hoogendyk.
“This is a wonderful loan. People should use it and pay zero down, and use their money for something else like investments,” she says. “Many service people don’t even use their VA benefits. You can even get a VA loan even if you have 55 percent debt-to-income ratio.”
VA rules state that veterans do not pay certain closing costs such as escrow fees.
These loans allow 100 percent financing with no down payment through the Rural Development United States department Agriculture. The house you want to buy must be within an area designated in the program. That doesn’t necessarily mean it has to be out in the boondocks. Some of the eligible USDA loan houses are in subdivisions of big cities, too.
The program is income-driven, meaning you can’t make more than 115 percent of the median income in your household. That means that even if grandmas I living with you, her income counts, too. This type of loan also allows for a gift down payment.
FHA Good Neighbor Next Door Program
The U.S. Department of Housing and Urban Development (HUD) is rewarding law enforcement officers, teachers and firefighters/emergency medical technicians by offering this unbelievable deal. HUD now sells homes for 50% off list price to these “good neighbors” with today’s low interest rates. And the down payment is just $100 if bought through a FHA loan.
“It’s a great program for those that qualify,” she says. “However, there aren’t a lot of these houses available, and generally speaking, many of the neighborhoods aren’t great. But when people find one, you can’t beat the price. You get 50 percent equity the day you move in.”
She says that you have to live in the house three years, then HUD forgives half of the cost of the home.