Everyone knows you need a down payment of at least 20% to buy a home. But is it fact or fiction for your first time loan? American consumers can be forgiven if they overestimate the requirements to get a home loan. Here are a few facts and fictions about buying a home without a 20% down payment.
Fact: A 20% down payment is considered the best way to secure a home loan. It represents your commitment to the purchase. Keep in mind, the house and property are collateral used for the loan. When you put a 20% down payment, the lender feels comfortable in offering the remaining funds.
Fiction: A surprising amount of loans were sold last year with less than a 20% down payment. Almost two-thirds of the loans issued last year were made with less. The downside to putting less than the 20% requirement is threefold: Higher monthly mortgage payments, higher interest rates on the loan, and the addition of PMI or private mortgage insurance, a policy that protects the lender for the gap between what you actually used for a down payment and the required 20%. So yes, it can be done – but the overall costs to the home buyer may be higher.
Fact: Without a 20% down payment, your chances of getting a loan could be decreased. A lender requires at least a 5% down payment for a conventional 30-year mortgage. Although some loans can be negotiated for even less, the potential home buyer should carefully examine the financial downside of purchasing with these terms. Higher mortgage payments or creative loans that offer lower initial monthly mortgage payments (ARMs or adjustable rate mortgages) can make the first years of homeownership easier. Your decision to take this type of loan should be based on the stability of your financial situation.
Fiction: Without a 20% down payment, your chances of getting a loan is almost impossible. There are numerus reasons why the 20% target may not be attainable. That should not stop you from considering your options. If you are having issues with your credit score, begin there. Getting your debt-to-income ratio lower will make you a more attractive risk for the lender. While a credit score of 780 is often considered the bar for A-type loans (offers with the best rates) a surprising amount of lenders will examine situations where the score was closer to 720.
Several Additional Facts: There are down payment assistance program to help. Fully 70% of potential home buyers are unaware that these services exist. While the goal is to get first-time home buyers into their first home, the real focus is working with these buyers to do so in spite of student loans. There have been estimates that 87% of potential buyers qualify. The average mortgage assistance is around $11,000. Many groups work closely to develop neighborhoods such as Neighborworks.org while others like Down Payment Assistance Resource puts borrowers in contact with over 2,200 programs. This includes veterans, economically-challenged families, and numerous ethnic groups.
Fiction: If it doesn’t seem possible, just give up. You should still consider your options. The Jones Group @ Sunriver Realty is available to discuss what might be available and how you might qualify. Obtain a pre-qualification from a lender, which is not based on verification the way a pre-approval for a loan is, and give us a call to discuss your options.
If you have any questions or would like more information, please contact me or any of our team members, we’d love the opportunity to assist you.
On behalf of The Jones Group @ Sunriver Realty
Nola Horton-Jones, Principal Broker/Realtor | ABR, C-RIS, e-PRO, GREEN, RSPS, CCIM Candidate
Bryce Jones, Broker/Realtor | ABR, CRS, e-PRO, GREEN, GRI, RSPS, SFR
Karen Marcy, Broker/Realtor
The Jones Group @ Sunriver Realty | 57057 Beaver Drive | Sunriver, OR 97707
Mobile: 541-420-3725 | Mobile: 541-420-4018 | Mobile: 503-327-9611 | Fax: 541-593-5123
Licensed in Oregon