Buying a new home is an exciting time. Most people begin their search by surfing online real estate sites, dreaming about the kind of home they’d like to find and trying to determine what kind of home they’ll be able to afford.
As they get further into the process, questions will undoubtedly start to arise. How much will a down payment cost? Will it need to be 20%, 5%, 0%? And how much cash is needed on hand to take to closing?
So, they may turn to Google. Varying opinions and advice from online ads, articles, or even Facebook friends may confuse them more than reassure them.
If you find yourself in this position and can relate, don’t worry. You’re not alone.
As it turns out, there isn’t necessarily a one-size-fits-all answer to these questions. In fact, the answer will depend on several variables.
Factors that can influence the amount needed for a down payment include:
- What type of loan will be used
- Whether the property is a primary residence, a second home or a rental property
- The amount of cash the buyer can bring to close
- What the buyer qualifies for
- The buyer’s preference
Whether a buyer will need a 20% down payment or no down payment at all may seem confusing- but read on to learn about the variety of options available and when each would be appropriate.
20% Down Payment Percentage
A 20% down payment is what most would think of as being the standard amount necessary when buying a home. While many buyers do put 20% down, most of the time it is by choice and not requirement. There are certainly advantages to doing so.
20% Down Payment Advantages
Foremost, buyers with a down payment percentage of 20% or more, avoid paying mortgage insurance. There is one exception though. If a buyer uses an FHA loan and puts down 20%, monthly FHA mortgage insurance premium and the FHA funding fee are still required. Obviously, a buyer with 20% down should choose an FHA loan as a last resort.
Another advantage is that a primary residence or second home buyer may waive escrows for taxes and insurance. Although many buyers like to include taxes and insurance into the monthly payment, some prefer to pay their own. Finally, each of these factors usually helps a buyer possess a lower monthly mortgage payment compared to other loans.
Sometimes buyers can pay cash for a home but borrowing the money at a low rate makes more sense. Depending on the scenario, some advisers recommend borrowing to buy a home and investing the cash.
How Can I Buy a Home With Less Than 20% Down Payment Percentage?
Fortunately, primary residence buyers have a multitude of program choices with nothing down to low down payment.
- VA loan
- USDA Rural Development Guaranteed Loans
- FHA loan
- Fannie Mae HomeReady
- Freddie Mac Home Possible
- Conventional 3 – 15% down payment
- Down payment assistance programs
No Down Payment Home Loans
The first two on the list, VA and USDA loans, have the ability for a buyer to purchase a primary residence with no down payment. VA loans are for current military, reservists, Veterans, and qualified surviving spouses. VA loan benefits are plentiful and far exceed just potential no money down. USDA home loans provide a no-money-down purchase option for buyers meeting USDA income limits and properties in USDA eligible areas.
VA Loan No Down Payment
Deservedly so, service members, Veterans, and qualified surviving spouses have an amazing option for buying a home. Possibly the best home loan in America. First time home buyers have the ability to buy a home with no money down up to the county VA loan limit. Repeat buyers who sell their prior home with a VA loan, may use their VA eligibility again up to the VA county limit. Furthermore, it is possible to have two VA loans at one time too. It is even possible to use a VA loan to buy a higher priced home through a VA jumbo loan. Although not a no-money-down program, it has the potential to be a very low down payment percentage for a jumbo loan.
Reasons to use a VA loan are much more than no down payment. Even though no down payment helps a lot of current and former military achieve home ownership, these guidelines make buy even easier…
Conventional Loan Low Down Payment Options
This is one home loan program where many erroneously believe the down payment percentage requirement is high. In actuality, certain conventional loans allow as little as 3% down payment percentage. Believe it or not, conventional loans offer more options for buying a property than any other home loan. Although, conventional loans do not offer a no-money-down loan (unless using a down payment assistance program), there are many reasons to consider conventional.
Conventional 97% Loans Help First Time Home Buyers
Often overshadowed by FHA as a low down payment option, Freddie Mac and Fannie Mae have two very affordable loans for first time home buyers. Fannie Mae’s version is called HomeReady which has a ton of benefits. Included are low down payment which may be a gift, discounted mortgage insurance, flexible debt to income ratio, and more. Freddie Mac’s version is called Home Possible and it has the same benefits. Each has household income limits, yet in some areas the limit is waived on either or both. So, always check both!
5% Down Payment Conventional Loans
Continuing with the conventional loan options with less than 20% down payment percentage, there are helpful strategies here. In the past, buyers had to put down at least 5% of their own funds for a conventional purchase loan. Now, the entire down payment may be a gift when buying a primary residence. Along with this benefit, buyers have the ability to get a loan with lower mortgage insurance, up to a 50% debt to income ratio, and many flexible buyer strategies. Furthermore, buyers that put 10 or 15% down will find that the mortgage insurance gets even cheaper. Additionally, conventional loan PMI may drop off of the loan. Sometimes in only a few years. Conversely, FHA and USDA PMI can continue for the life of the loan.
How to Buy a Second Home With Low Down Payment
Not everything is about buying a primary residence. Owning a vacation home is a dream shared by many and owning one is not as tough as you would think. Conventional second home loans allow a buyer to put down as little as 10% of the sales price. Believe it or not, 5% of the price may be a gift too! There are actually ways to potentially borrow the whole purchase price on a vacation home. Click below to learn more.
A USDA No Down Payment Loan Rocks!
We say it all the time. USDA Rural Development benefits are off the chart. Plus, many have the misconceptions that USDA is only for low price, low income, and farming. Actually, families may make just over $100,000 a year, most properties in the U.S. qualify, and purchase prices may be in the $400,000’s. All that and these benefits…
- Down payment percentage is zero
- Lowest mortgage insurance for low down payment
- 620 minimum credit score
- Seller may pay closing costs
- Use higher appraised value to finance closing costs
Wondering if USDA is right for you? Check out these very popular USDA loan articles to learn more
Low Down Payment FHA Loan
First time and repeat buyers have the ability to buy a home with a very low down payment. FHA loans provide many of the most flexible guidelines to allow buyers the opportunity of home ownership. Even though FHA is one of the most flexible home loans available, interest rates are competitive with the best of other loan types. The standard, minimum FHA down payment is 3.5% of the purchase price. Although, there are possible lower down payment options with FHA loans. Over and above the standard FHA loan, there is the HUD $100 down payment program available for specific HUD foreclosure homes. Additionally, down payment assistance is often paired with an FHA first mortgage to make for an even lower down payment option. Potentially, a no down payment loan!
Have a Discussion About the Right Down Payment Percentage For You
Many of the low-to-no down payment programs are very similar to each other. Plus, buyers do not use mortgage guidelines every day.
If you have questions about the right loan option for you, you aren’t alone! Give one of our experienced, dedicated loan officers a call.