Understanding Mortgage Down Payments

How Much Money Do I Need?

Of all the questions you may have about buying a new home, perhaps the biggest one is this: How much money do I need?

Buying a home means so much more than just putting a roof over your head and it is one of the most rewarding decisions you and your family could ever make! Buying a home is also a smart financial move (especially if you’re currently renting) as home ownership builds wealth through the forced savings of paying down a mortgage, appreciation of the asset and the tax benefits a home provides.

To buy a home, you’ll need money to cover a down payment, closing costs, pre-paid items and reserves. It’s possible to get a mortgage with a down payment of as little as 0 – 3.5% by taking out a government insured loan, however, the amount you are able to put down will affect the interest rate you are offered.

Helping you find a way to finance your home is what your chosen home mortgage consultant will help you to do after speaking with you about your goals and resources in order to come up with a financing plan that makes sense for you.

0% Down Mortgages

How do you get a lender to give you a mortgage with no money down? You tell him that the United States government will pay off the loan if you can’t or won’t.

USDA Rural Development

If you are a home buyer who wants to live in a rural area, you should check out USDA Rural Development or contact a USDA Certified Lender (contact us for a referral).

USDA offers direct mortgages with subsidized interest rates to modest to low-income borrowers—rates as low as 1%. You will eventually have to repay the subsidy that bought down your interest rate. But it’s one way to get in the door.

These mortgages are finicky. You’ll need to complete additional paperwork and the program has limitations on the kind of property you can buy, but you’re getting a loan with 0% down that is more flexible on credit and most buyers are willing to put in the extra effort.

Veterans Administration

If you were discharged honorably from the U.S. military after active duty, you may qualify for a 0% down mortgage guaranteed by the Department of Veterans Affairs.

In exchange for getting a mortgage without putting any money down, you’ll pay a guarantee fee. It will be included with your closing costs and financed in your mortgage.

Guaranteed loans are not cheap when you figure in the fees. But if you want to buy a home quickly and feel confident you’ll be in your house for a long time, you might find one a good fit.

Less than 5% Down Mortgages

Once again, if you’re looking for the lowest down payment, you’ll look for government financing.

State Housing Finance Agencies

Each state has a housing finance agency that promotes homeownership and provides funding.

In Ohio, the mortgage program funded by our state housing finance agency is the Ohio Financing Agency (OHFA). It offers down payments as low as 1% with forgivable loans for the down payment funds. If you qualify OHFA will issue assistance in the amount of 2.5% of your home’s purchase price. If you take advantage of the assistance, your mortgage interest rate will be .5% higher than OHFA’s current mortgage rates.

You’ll find similar programs if you check out your state’s housing finance agency.

Federal Housing Administration

Around since 1934, the Federal Housing Administration (FHA) helps people buy homes with as little as 3.5% down. It’s one of the most popular mortgages available and has become increasingly important as conventional lenders continue to tighten up their standards.

Although FHA loans used to be available to nearly everyone they have also tightened their standards. If your credit score is less than 600, you may still qualify for a mortgage. But you’ll pay higher mortgage insurance fees.

(update June 2013: As of this year, FHA requires borrowers pay mortgage insurance for the life of the loan. This coverage no longer terminates when a borrower pays down their mortgage establishing a 20% equity position. In addition, FHA has increased its Upfront Mortgage Insurance to 1.75% of the base loan amount.)

Less than 20% Down Mortgages

If you have good credit, some savings, and steady work you can qualify for a conventional loan. As with the other loans referenced above, borrowers who put down less than 20% will be required to pay mortgage insurance until they have at least 20% equity in their home.

If you live in an area where average home cost $450,000, saving $90,000 to avoid paying mortgage insurance might take a long time.

20% or More Down Payment Mortgages

Whether you save the full 20% down payment yourself, or receive a portion from other sources such as a family gift, a local first time home buyer’s program, etc. you’re getting the best deal when you put more down and you’re not paying money to a mortgage insurance company month after month just to reduce the risk to your lender.

What’s the Right Down Payment for You?

Just because you can buy a house with no money down doesn’t mean you should. Low money down mortgages make more sense for some borrowers than for others, for example if you carry other debts, such as student loans, credit cards, etc. with higher interest rates.

But if you’re confident you’ll be in your house for a while and your job is stable, buying a house with less than 20% down might be the right fit for you.

Related Articles

What is Private Mortgage Insurance (PMI)
PMI vs Second Loan
Sources for Your Down Payment
Determining How Much Home You Can Afford

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