Your Buyers May Not Realize 20 Percent Down is Not the Norm
Mortgage rates are slowly and steadily rising. These current market conditions make buying a home particularly attractive in today’s market. Homeownership has always been viewed as one of the central pillars of the American dream and, because your home is often your largest asset, it can be an incredible means for creating greater stability, wealth, and financial security. However, there’s a common misconception among many prospective homebuyers and investors that banks require a 20 percent down payment in order to finance a real estate purchase. You may not need 20 percent down to qualify for a mortgage.
Plenty of Options
According to the National Association of Realtors (NAR), nearly 40 percent of people 34 years or younger don’t know they can qualify for a mortgage without a 20 percent down payment. Only 13 percent in this same age group believe they can buy with five percent or even less money down. Meanwhile, a recent Realtor.org survey revealed that among first-time homebuyers who obtained a mortgage, nearly 80 percent put less than 20 percent down. Among all buyers whose transactions closed in April 2017, about six in every 10 who obtained a mortgage made a down payment of far less than 20 percent. Given these numbers, it is vitally important for any buyer to realize that there are many options for making a smaller down payment than they may be expecting [see sidebar].
An Often-Overlooked, Money-Saving Solution
For many borrowers, conventional loans with private mortgage insurance (MI) have a number of cost-effective benefits compared to FHA loans, which can increase purchasing power for homebuyers. For instance, in contrast to FHA loans that require a down payment of at least 3.5 percent, borrowers can obtain a conventional loan with private MI with as little as three percent down. That half percent equates to serious money when you’re considering a mortgage of $200,000 or more! What’s more, FHA loans require an upfront mortgage insurance premium (MIP) of 1.75 percent, which creates an additional expense for homebuyers that may be avoided by using private MI.
Perhaps best of all, private MI is temporary. It automatically cancels when a borrower reaches 78 percent equity in their home or is cancelable upon request when he or she reaches 80 percent equity. This naturally results in the monthly mortgage payment going down. So, in effect, private MI loans become less expensive over time. Conversely, the majority of FHA loans require government mortgage insurance premiums throughout the life of the loan. This benefit of private MI allows homeowners to save many thousands of dollars over the years.
The Case for Making Your Move Today
Homeownership can be one of the greatest contributors to an individual’s financial stability and wealth creation. When interest rates rise (as they are likely to do), low down payment programs like conventional loans with private MI help people get into homes sooner so they can begin to build their future. By remaining on the sidelines in the current market, potential homebuyers may miss out on the opportunity to own their preferred home and will spend more money on rent that could instead go towards building equity in their own property.
Know Your Options: How to Land a Low Down Payment
Borrowers have several options available to them if they want to land a low down payment:
• Conventional loans backed by private mortgage insurance (MI)
• Combo loans, also known as “piggy back loans”
A combo loan involves the borrower taking out two loans: one to cover the down payment on a property and a separate loan to cover the remainder of the purchase.
• Government-insured loans through the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the U.S. Department of Agriculture (USDA) that allow for lower down payments
In most cases, borrowers opt for either conventional loans with private MI or FHA-insured loans.