There is a well-rooted perception that to buy a home, especially your first one, you should keep saving and renting until you can make a 20 percent down payment. Reality is far different and knowing your options may get you through the door to homeownership that much sooner.
Doing More with Less
Black Knight Financial Services reports that 1.5 million borrowers became homeowners in the 12 months ended June 2017 with down payments of less than 10 percent. Most of these loans were conventional, fixed-rate offerings made through the Fannie Mae, Freddie Mac, and FHA loan programs. Because these agencies are now able to accommodate this type of loan, close to 40 percent of all new mortgages are being made with low down payments.
|Mortgage Programs||Minimum Down Payment|
|Conventional Loans||3–5 percent|
|Conventional Jumbo||10 percent|
|FHA Loans||3.5 percent|
|VA Loans||0 percent|
|USDA Loans||0 percent|
Down payment requirements may differ for condo purchases or new construction.
Weighing the Trade-Off
While it’s possible to get into a home sooner with less money up front, mortgages made with low down payments do come with the added expense of mortgage insurance premiums until that 20 percent equity level is achieved. They also typically result in the borrower paying more interest over the life of the loan, which could make the ultimate cost of the home higher.
However, proceeding with a low down payment might still save you money over the long run. You will no longer be paying rent and may realize tax savings after deductions for your higher interest expense and property taxes. Potential gains in the home’s value can also make the earlier purchase and expenses worthwhile over time. So, it is important to consider how these varying factors may affect your near-term budget as well as the potential for a long-term gain in your net worth. In many cases, your Loan Officer or financial advisor can help you weigh the alternatives.
Going through the preapproval process with a Loan Officer is an effective way to gauge how much home you can buy—and afford—given different down payment scenarios. It will also help you engage the attention of a Real Estate Agent. Having a preapproval letter will ensure they view you as a serious buyer instead of an aspirational browser still building your savings.
When it comes to down payments, in today’s market it isn’t as much about the amount you put down as it is how much you can comfortably afford to owe. Once you know that, homeownership is in reach.