(Part II in a series on buying a home)
There is a prevalent belief that you need a down payment of 20 percent to purchase a home. This is not the case, even for a conventional mortgage loan. Depending on how much house you are buying and whether you qualify for certain programs, you may only need 10 percent, 5 percent … or no down payment at all.
With the high cost of renting, many New Jersey residents would rather put that money toward a monthly mortgage than hand it over to the landlord. If that’s your American Dream, you shouldn’t let the lack of a big down payment hold you back.
The 20 percent down payment is mostly a myth
A 2016 survey by Wells Fargo confirmed that 40 percent of adults are under the impression that buying a home requires 20 percent down. Most couples would be hard-pressed to raise 20 percent of the list price: $50,000 on a $250,000 starter home or $100,000 on a $500,000 house.
In reality, it’s not necessary for first-time homebuyers to come up with that much money:
- Qualifying VA and FmHA home loans require no down payment
- If you qualify for an FHA loan, the minimum down payment is only 3.5 percent.
- A conventional loan (through Fannie Mae/Freddie Mac) requires just 5 percent down (up to a $417,000).
- “Jumbo” loans for homes valued over $424,00 are usually available for 10 percent down.
You do not necessarily have to wait until you have saved up the whole down payment. Most loan programs allow homebuyers to use money borrowed or gifted from their parents or family members. See our recent blog about the trend toward crowdsourced down payments.
So why is 20 percent the magic number?
If you are able to swing 20 percent down (or more), your monthly mortgage payments will be smaller (or you can buy a bigger house). You probably qualify for a lower interest rate, or a shorter loan period such as a 15-year mortgage.
Lenders prefer a big down payment because the more equity you have in the property, the less likely you are to default on the loan. If you put down less than 20 percent, lenders typically require PMI (private mortgage insurance). Typically, you must carry PMI until your loan-to-value ratio drops below 80 percent. (In other words, when your down payment plus the payment on the principle equals 20 percent).
Explore the options … and protect yourself
A real estate agent or local banker can explain different mortgage programs and how much down payment you might need. However, only a lawyer can protect you if anything goes wrong with the purchase or sale of a home.
Next blog in the series: 5 Reasons You’d Need An Attorney For A Real Estate Transaction
Source: How Much Of A Down Payment Do You Need To Buy A House? (NewHomeSource.com)