If you’re like most home buyers, a down payment may seem like an obstacle between you and your dream home.
Saving up to 20 percent for a down payment is often stated as the rule of thumb, or even the requirement, but the reality is that most homebuyers are putting down much less than that and are still able to get mortgage financing.
In fact, the average down payment has been 6 percent for the last three years, according to the National Association of Realtors.
Don’t have 20% lying around?
At Liberty Home Loans, we offer several types of mortgage options that allow homebuyers to qualify with a low down payment or no down payment at all.
- FHA – FHA loans typically require a 3.5 percent down payment, but that can go up to 10 percent if you have a poor credit score.
- VA – If you’re eligible for a VA loan, you’re in luck. VA loans don’t require any down payment from the borrower, they don’t charge mortgage insurance AND they have no minimum credit score requirement. Where did the 20% rule come from?
- Fannie Mae – Fannie Mae’s HomeReady mortgage program requires a minimum 3 percent down payment. HomeReady loans don’t require perfect credit scores, and they also allow borrowers to use other sources of funding for their down payment, like a gift from family or friends.
- Freddie Mac – Freddie Mac’s Home Possible Advantage mortgage program also requires a minimum 3 percent down payment, doesn’t require perfect credit scores, and allows borrowers to use other sources of funding for their down payment.
- USDA – Living in a rural area? You may be eligible for a USDA mortgage loan. USDA loans do not require down payments. Homeowners don’t have to have perfect credit scores, but they also can’t have prior foreclosures, bankruptcies, or major delinquencies in the past several years. Areas are classified as “rural” when they have fewer than 10,000 to 20,000 residents. To determine if your area is considered rural, check out their property eligibility map.
So where did the 20% rule come from anyways?
Experts often suggest that prospective homebuyers put down 20 percent so that they avoid having to pay for mortgage insurance. When your mortgage amount is greater than 80% of your home’s value, a lender can add an additional monthly mortgage premium of between 0.20 and 2.0 percent of your total loan balance each month. It doesn’t sound like much, but it can add thousands of dollars to your loan costs over time, especially if you have a standard 30-year mortgage.
In addition to mortgage insurance, factors like interest rates and home appreciation should be considered. Taking the time to save for a higher down payment can significantly postpone your home ownership. Rates remain historically low right now. As they rise, the amount of home a borrower qualifies for could decrease. As a home appreciates in value, that 20 percent becomes a higher dollar amount.
Want to see which type of mortgage is right for you? Contact Liberty Home Loans today to begin the discussion.