Pay 20 Percent Down? Maybe Not.
Although it's an outdated number, the thought of a 20% down payment deters many would-be buyers from even considering owning their own home
Thankfully, we're here to dispel the rumors once and for all: this intimidating percentage isn't necessary for the purchase of a home. In reality, buyers have the option of applying for several types of loan programs that require a fraction of that – as little as 3% of the sales price (and even 0% in some cases).
Let’s take a look at the options:
- FHA Loans: 3.5%: The easiest loans to qualify for, FHA loans have looser credit restrictions than other options.
- VA Loans, 0%: For military members, veterans, and their families, VA loans offer low down payments and interest rates.
- USDA Loans, 0%: These loans (reserved for first-time buyers and buyers in more rural areas) are offered by the U.S. Department of Agriculture.
- Conventional Loans, 3%: Ideal for borrowers with stellar credit, conventional loans can drop as low as 3% down (though at least 5 percent is recommended).
Private Mortgage Insurance
If you pay less than 20% down on either FHA and Conventional loans, you’ll most likely be required to get private mortgage insurance (PMI), which covers your lender in case you default. This PMI increases your monthly payment a bit, but once you own at least 90 percent of the home, you can request that your lender cancel it. It takes a few years, but it will bring your payment down significantly when they do.
While creating a budget, it's easy to get hung up on the mortgage numbers alone. However, we recommend keeping other up-front payments in mind when looking at the price of a home. Many buyers get caught off guard by closing costs and other fees, that (depending on the value of the home) can add thousands out-of-pocket. All that to say...be careful about spending your entire "rainy day fund" on a down payment.
Down Payment Calculator
In the end, it’s best to use a down payment calculator to determine how much you should put down. These tools let you calculate your monthly payments based on the home price + the down payment percentage you’re comfortable with. Tweak the numbers until you find a monthly payment you can afford (AKA one your household income will comfortably cover). This magic number varies for every buyer, so work with your family members, your len der, and your real estate agent to find a down payment that works for you.