In order to purchase a new home, you will likely need at least a down payment of at least 3% of the purchase price. However in most cases, banks will want to see a down payment of at least 10% to 20% plus funds for closing costs.
Lending requirements for homes have grown stricter in the past several years but there are still some programs which allow people to buy a home with little money down. Do your research and talk to a qualified mortgage broker to help you identify the optimal down payment for your home purchase.
What is a typical down payment?
Banks ideally like to see a down payment of 20% of the purchase price on the purchase of a new house. This means that if you are purchasing a house for $200,000 you will need a down payment of $40,000.
If you have good credit and income/employment history, many banks will allow a down payment of 10%-15%. These loans are harder to qualify for, and they may have a higher interest rate to balance the risk of the lower down payment. Such a sizeable down payment can be difficult for many homebuyers, especially if they are making their first home purchase. In order to accommodate these purchasers, many banks and government agencies offer special financing programs for low down payment loans.
How can I get a low down payment loan?
The most common programs for low down payment loans are FHA and VA. These loans allow a very low down payment, but there are qualification restrictions and some additional fees involved.
FHA loans are government-insured loans that enable a borrower to purchase a house for as little as 3.5% down. In order to qualify, the buyer must have good to excellent credit and verifiable income. FHA loans require the buyer to purchase mortgage insurance, which is an additional monthly premium added to the cost of the mortgage. Mortgage insurance protects the lender if the buyer defaults on the loan.
VA loans are structured very similarly to FHA loans. The VA program is exclusively for service members or veterans who are buying a home. With a VA loan, the homebuyer can put as little as 5% down.
Other low down payment options may be sponsored by state agencies. In some cases, these loans may require as little as 0% down but are usually subject to income restrictions. To find out about these programs in your state, contact a licensed real estate broker or call your state’s Housing Office.
What are the drawbacks of a low down payment loan?
While a low down payment loan may seem like a great way to save cash, it could end up costing you much more than a traditional loan in the long run. Low down payment loans typically have higher interest rates than traditional loans. Banks do this because they recognize that a low down payment loan is a riskier investment. Over the lifetime of the loan, paying higher interest rates will likely add up to much more than the difference between 5% and 20% down.
Mortgage insurance is another expense associated with low down payment loans. Mortgage insurance can cost anywhere from $20 to $200 per month, depending upon the size of the loan and the risk involved. In many cases, mortgage insurance can be dropped once the buyer reaches 20% equity in the home. This means that the additional premium can be dropped when the amount left on the loan is 80% or less of the home’s appraised value. However, under recent changes to FHA guidelines, mortgage insurance must be kept for a minimum of five years, regardless of the homeowner’s equity in the property.
Low down payment loans also tend to have higher closing costs than traditional loans. This is partially because there is more paperwork and the loan is more time consuming to service.
What other expenses should I plan for besides a down payment?
As a homebuyer, you should be aware that a down payment isn’t the only cash you will have to outlay when purchasing a property. Understanding the other expenses involved can help you realistically plan for what kind of down payment you can afford.
Prior to closing, you will have to pay for inspections and appraisals on the property that you are buying. These fees can cost anywhere from $300 to over $1000 and then you have have closing costs. Closing costs include lender fees, title fees, legal fees and more and can quickly esclate to another 1%, 2% or more of your purchase price.
Depending on your lender, closing costs may be rolled into the total amount of the loan. If you choose this option, make sure you know how much it will affect your loan amount and if your lender will still qualify you for the increased amount. This will also slightly increase your down payment as a percentage of the increased total loan.
The key to choosing the right down payment option for a home purchase is to understand all the facts and costs involved up front. Even no money down home loans still often require a nice chunk of change to close.
Compare Mortgage Rates online today!