You have goals. And not just little goal. Big goals. Expensive goals. You want to buy a house. There is only one small problem in the way of you attaining this particular goal. And that is money.
Many wanna-be prospective home buyers believe that they must have a considerable amount of money set aside to purchase a home. The traditional wisdom and popular circulating notion is that you need to have a minimum of 20% down before even entertaining the thought of looking at a property. Luckily, for those without a considerable pile of Benjamins stocked away for JUST this purpose, this false perception is being served an eviction notice.
While the 20% ideal is not entirely unfounded, it can be a difficult goal to reach, especially in higher priced markets. When you can easily afford the house payment but struggle to save for a down payment fast enough to buy before your 2 year old graduates from medical school- you have options. Prices are good, you can afford the payment, and this is what you truly want without feeling pressured by friends or family. Now what?
If you are not in the position to wait for that 20% while browsing the real estate market, it’s time to consider the new minimum. With great credit and a favorable lending profile, you can go as low as 3% -3.5% of the purchase price for a down payment. The amount required is determined by the type of loan you are getting.
If you have a high FICO score, it’s possible to get a conventional loan for 3% down. Your FICO score is influenced by your credit history, payment information and outstanding debts. Since conventional loans programs are offered by private lenders, score requirements generally hover around the 680 mark, set by Fannie Mae and Freddie Mac. Maintain a healthy score to benefit from better interest rates and a lower down payment minimum. Not all lenders will offer this option, but with a little shopping around, it shouldn’t be hard to find. Remember, as a general rule, any down payment under 20% will require the borrow to pay an additional insurance premium on the loan called PMI (private mortgage insurance). With Conventional loans, the PMI can effectively “drop off” after the loan hits specific value and/or time requirements.
Loans offered through the Federal Housing Administration (FHA) are popular among first time home buyers, as they have a lower credit score requirement, can be more forgiving, and allow a higher debt to income ratio that conventional loans. You must have a credit score of at least 580 for the 3.5% minimum down payment requirement. FHA loans are generally easier to obtain than conventional loans, bu at this time, they will carry the PMI requirement for the life of the loan. There is also an upfront MIP charge (currently at 1.75%) that can be built in to the loan itself. If you can qualify for conventional, they can be the cheaper option in the long run.
Starting in 1944, the U.S. government began offering a loan program specifically for our military vets. Over time, the program has evolved, and is currently offering specialized loans to eligible active and veteran military with features like zero down payment and additional reduced fees. Unlike conventional and FHA loans, VA loans don’t require mortgage insurance. There is a funding fee of at least 1.25% the loan amount, but interest rates are considerably lower to counteract this bump. This can be a great mortgage option for those who qualify.
The United States Department of Agriculture (USDA) also offers loans with zero down payment financing, but you must meet specific (low) income requirements and purchase a home in an eligible rural location. You can check your area on their map to see if you may qualify based on location. Interest rates and mortgage insurance payments are lower with a USDA loan, and you don’t need a perfect credit score to qualify. If you think you may qualify, this can be an ideal option for some.
Additional Ways to Make it Happen
Other possible allowable ways to get cash for a down payment may include receiving gift money from family/friends (it will need to be properly documented so first talk with your lender about this option), selling your stocks, using your tax refund and selling personal property. Talk it over with your tax or financial advisor before making any rash moves however. Best not to get yourself in a bind due to impatience and rushed action.
Important: If you decide to use cash, there are “seasoning” requirements and documentation that may need to be provided. Talk with your lender about how to use these funds in a way that would not disallow you from obtaining financing.
Moral of the Story
You don’t have to be bound to the traditional 20% rule, but keep in mind that putting less money down will lead to larger monthly mortgage payments as a trade off. You will also have to pay private mortgage insurance in most cases, and interest rates can skyrocket with bad credit.
If you’re looking to buy a home in the near future, examine your current situation. Make sure your income will cover your monthly expenses, mortgage payments and the price of the home you’re interested in. Add in a monthly cushion for maintenance so as not to forget this costly and often overlooked expense. A good rule of thumb is as follows: After figuring out what you proposed mortgage would be at the price point you are considering, start saving that amount monthly. If your rent is $2000 and your mortgage would be $2500, start saving an additional $500 on top of paying your rent. If you can do this easily, not only will you save more money toward your purchase, but you will prove to yourself that you can afford the house. This will not only help you save, but will also help you from getting in over your head on your financial comfort zone. Buying a home that you can readily afford sets you up for financial success now and well in to the future.