August 22, 2012

Do You Really Need to Put 20% Down?

There’s a widespread perception that you need to put at least 20 percent down to buy a home these days. Fortunately for home buyers, that’s just not true.
A recent analysis found that the average U.S. mortgage down payment is about 12.25 percent. That means there are a lot of buyers out there who are putting down even less than that.
In fact, even in today’s mortgage market, it’s still quite possible to buy a home with a down payment of 5 percent or less. You can even still get a mortgage for 0 percent down through certain programs, which aren’t as hard to qualify for as you might think.

The primary remaining source of no-money-down mortgages these days is the Veterans Administration, through a VA home loan. Of course, to qualify, you typically have to have either served or be serving in the military.
What’s less well known is that certain nonmilitary persons can qualify for VA mortgages, including certain surviving spouses of veterans, officers of the Public Health Service or National Oceanic and Atmospheric Administration and certain others.

Even if you’re not a vet, you can still get a zero-down payment mortgage through the USDA Rural Development Service. There are certain restrictions, however. Your income can be no more than slightly above the average for your area, you have to presently be without adequate housing and the home you buy must be in a rural area. However, the USDA’s definition of “rural” is quite broad and includes many small cities, towns and suburbs.
Though the program is self-funding, funds for USDA mortgages are limited, so it’s best to apply early in the year to have your best chance of being approved. Otherwise, you may have to go on a waiting list until the following year.

FHA Down Payment as low as 3.5%:
The most popular low-down-payment mortgage program is the FHA, which allows down payments of as little as 3.5 percent. FHA mortgages traditionally made up only a small slice of the real estate market, with a clientele of mostly lower-income and first-time homebuyers, but their popularity has exploded since the subprime mortgage crisis as a source of low-down payment home loans. An increase in lending limits to as much as $730,000 in some areas didn’t hurt either.

Conventional Mortgages:
Outside of those programs, you can still get a conventional, “standard” mortgage with as little as 5-10 percent down. These loans, which are backed by Fannie Mae or Freddie Mac, generally require better credit than the programs mentioned above, but some lenders will still accept you with a sub-700 credit score, rather than the “perfect” scores many people think they need these days.
A lender is also more likely to approve you for a mortgage with 5 percent down if you’re buying in a local market where real estate values have been relatively stable, rather than one that experienced steep declines during the downturn and is still unsteady.

Lower Down Payment = Higher Costs:
One thing to note about all these low-down-payment programs is that they’re typically more expensive than a mortgage where you put 20 percent down. Your interest rate may be a bit higher, and in most cases you’re going to have to pay some sort of mortgage insurance, either up front or as an annual fee, or both.
Both VA and FHA mortgages charge funding fees that vary depending on the amount of your down payment, with higher fees for smaller down payments. Conventional mortgages backed by Fannie Mae or Freddie Mac require private mortgage insurance (PMI) on mortgages with less than 20 percent down, which effectively raises your mortgage interest rate by about half a percentage point.

3% Down, No Mortgage Insurance:
One low-down payment program that doesn’t require mortgage insurance is Fannie Mae’s Homepath, which is the agency’s program for selling foreclosed properties that have come into its inventory. Homepath mortgages require only 3 percent down, there’s no requirement for mortgage insurance and you can borrow up to an additional $35,000 for necessary renovations and repairs.
It’s also not limited to buying a home for your primary residence – the program can be used to buy second homes and investment properties as well.
Though mortgage credit is much tighter these days than it was just a few years ago, it’s still quite possible to get a home loan with a minimal down payment.  Remember, not all lenders have the same lending standards or requirements, so it’s often just a matter of finding the right one who meets your needs.

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