For most people, owning a home is a major step in life. There are many financial and even emotional benefits to owning your own home. Unfortunately, for many the idea of owning their own home seems too far-fetched. Among the most common of problems, is coming up with the money for a down payment. This is a major problem for many would-be first-time home buyers, or at least they think it is.
Many first-time home buyers believe that they need to be able to put at least 20% down, this isn’t the case, in fact, in most cases it is better to put less down.
The reality is, you can afford to get a home with as little as 0%,1%,or 3.5% down. Each option carries different benefits as well as drawbacks.
The 0% down option:
This is a topic that I have covered in another blog post here. I’ll briefly cover the benefits and drawbacks of a 0% down, but for more detailed info, check out the post linked above.
VA, FHA, and USDA loans all have methods to get a home without putting a single penny down out of pocket!
Benefits:
· These are good options if you don’t have any money saved, but still have good (700+) credit
· Allows you to move in without putting any money down.
· You also immediately start building equity, though you are starting from 0% equity.
Drawbacks:
· Depending on which loan you get, you may end up paying a bit more per month with a 2nd loan, as well as mortgage insurance. However, it is likely still going to be comparable to renting a home of the same value.
· In the case of USDA loans, you end up living in rural areas, which, if you like that sort of thing, isn’t really much of a drawback.
· There are also limits in some cases on how much income you have, and what kind of home you can get.
The 1% down option:
This is a much better option for those who can afford to save up a small amount of money. Consider for a moment a $200k home. The down payment at 1% would be around $2,000 or around 2 months’ rent for a 2 bedroom apartment.
This loan is actually a 3% loan that the lender pays 2% out of their own pocket as a grant to help finance, money that doesn’t have to be repaid (a gift). This option requires that the borrower have good credit (700+). The remaining 1% can either be paid by the borrower, or be a gift by parents, friends, etc. This is a better option for those who have access to some kind of down-payment.
Benefits:
· You get to move into a home quicker.
· You don’t need a 2nd loan to help finance the home or have to live rural.
· This gets even better if you can convince mom and pops to gift you the 1% down for the home.
Drawbacks:
· The mortgage insurance can be a bit higher if you only put 1% down.
· This would effectively be a 3% conventional loan, which means that for a while the payments will be higher that they would normally be. But eventually this mortgage insurance drops off.
· The borrower needs good credit to qualify for the program
The 3.5% down option:
FHA minimum requirements are usually around 3.5% down, which for a $200k home is around $7,000. This is a great option for those who are a bit deficient in their credit. And while $7k may seem like a lot, remember that some of that can come in the form of a gift. The loan carries mortgage insurance, which will make it a bit more expensive, but typically these loans are refinanced later into a conventional loan by the borrower once they have paid down the loan a bit. If you have around 3% saved up for a down payment, this might be the option for you, saving that extra .5% or having it gifted, can net you less mortgage insurance than you would pay with a 3% conventional.
Benefits:
· You get to move into a home quicker.
· Credit scores can be lower.
· FHA is more forgiving of debt.
· Lower Interest rates!
Drawbacks:
· Carries mortgage insurance, which causes the loan to be more expensive than if it were conventional with 20% down, due to the extra payment of mortgage insurance.
· Limitations on what kinds of home you can buy (No fixer-uppers, no loans over $337k).
The Bottom Line:
The above options are only a few available to the average home buyer. Don’t let a down payment deter you from owning a home. There are so many options these days for people to move into a new home with little to no down payment, that it doesn’t make sense to pay rent anymore.
While having a larger down payment reduces the overall amount that you end up having to repay, moving into a home immediately means that you are building equity.
As for paying 20% down, it’s great if you can afford it right off the bat, but most people can’t. Remember, you will always end up paying a mortgage. Either your own, or someone else’s. If you aren’t sure that you are ready to own a home yet, check out our guide of things to consider before buying a home.
If you have any questions, don’t hesitate to contact us for free information regarding the path to home ownership.
In the meantime, take care and have a wonderful day!
