Low Down Payment Purchase Options
For many people who are considering buying a home, how much money to use as a down payment can be very confusing.
The best route depends on your situation and personal preference. Below are four issues that all home buyers and investors should explore when considering a down payment:
Please consider the information below an opportunity to explore your many options. By no means is this designed to steer you toward any particular program—instead the hope is to expose you to the options you may wish to consider when purchasing a home or investment property.
Down Payment Options
Conforming loans will require certain minimum downpayments, as will some of the available alternatives with non-conventional (FHA loans) programs.
As an example, you can purchase a single-family home or condominium with as little as 3.5% down—but there is most certainly a cost associated with lower down payments. In many cases, mortgage insurance (often called PMI, private mortgage insurance) will be required.
PMI is required when the conforming loan amount is MORE than 80% of the purchase price (in other words, when your down payment is less than 20%). Generally speaking, the lower the down payment, the higher the premium ratio.
Veterans of the U.S. Armed Services who qualify for a VA loan have the easiest route to buying a home with little money down. VA loans can provide up to 100% financing for qualified military personnel and veterans.
There are some non-conforming mortgage loan programs that allow for 80/20 options, allowing borrowers to obtain a second mortgage to cover their 20% down payment.
Regardless of your credit and income situation, you have some options to purchase a home with no money down.
Cost of a Lower Down Payment
Putting less than 20% or utilizing a zero dollar down payment program will generally have two primary costs:
Whether you are using a conforming loan or a non-conforming program, if you choose a small down payment, you will need to pay higher interest rates and mortgage insurance.
Mortgage insurance is calculated against the loan amount. Lower down payment means a higher loan amount and a higher mortgage insurance rate.
Mortgage insurance may be removed once you have earned sufficient equity. Generally your property will need to show at least 20% equity—in which case, your mortgage insurance can be refinanced away.
Also, lower down payments generally means a higher loan amount, which translates into higher monthly payments.
Consider, for example, the purchase of a $100,000 home with 6.5% interest:
During the first few years of your mortgage, the bulk of your payments go directly to pay the interest. You can generally deduct interest payments from your taxes—so you actually get a bit of your monthly payments back at the end of the year in the form of tax deductions.
Benefits of Lower Down Payments
The benefits of a lower down payment include:
Deciding how much money to put down on a home is a big decision and should involve conserderable thought. Calculations based on monthly payments, affordability and overall goals are crucial. Lenders will qualify you for certain programs based on your credit score and income, but at the end of the day, you need to understand what you are commiting to and be comfortable with it. LifeSource is glad to help you understand all of your options.
In some cases, home buyers are qualified for a mortgage that is higher than they are comfortable paying. The best way to satisfy this is to increase the amount of money down to then decrease the amount you pay per month. That, or find a less expensive property. Again, LifeSource Mortgage representatives are experts in working with buyers to find the program that best fits their needs.
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