Buying a home is perpetually one of the biggest dreams in life. However, not having up to 20% or even 10% of the required down payment may be discouraging. Not to worry, the fact that you haven’t saved up enough money for a large down payment doesn’t mean your hopes of buying a house are dashed. For those ready to buy a home, read how to buy a home.
Overall about 26% of home loans are made with a down payment of less than 10% of the house value. The number of buyers who bought homes with less than 10% down payment has increased over the past five years. This is primarily due to the reduction in the cost of mortgages offered by the housing administration. These policies allow underwriting loans to those interested in borrowing with lower down payments. Although critics worry that the upsurge in low money down lending may set the level for a reprise of the housing bubble. The principal reason for the change is to make home ownership a more realistic goal, especially for all first-time buyers. There has not been a significant deviation in the number of individuals who default on the low down payment as opposed to those who default on the high down payment loans.
With Federal Housing Administration (FHA), purchasers have the opportunity to make down payments of only 3.5% the value of their home as long as they meet the requirements. With the Department of Veterans Affairs (VA) and United States Department of Agriculture (USDA), purchasers have the opportunity of making no down payment as all as long as they meet the minimum requirements. With Conventional Loans, purchasers can purchase a home with a down payment as low as 1% as long as they meet the minimum requirement.
If you are considering opting for a small down payment loan, then there are certain things you must put in place. The first thing you should recognize is that you would have less equity in your home. You would also need to pay for private mortgage insurance, which is demanded on any loan with less than 20% down payment.
If you desire to buy a home and you cannot afford the required amount as down payment, then you need to keep the following in mind:
Private mortgage cost. Except for VA Loans when you put down less, you would accept to pay private mortgage insurance. You cannot avoid this piece as it is required for anyone buying a home with a down payment less than 20%. In the long run, this kind of loan may be more expensive than paying the 20% upfront. Some agencies like USDA and FHA now demand that borrowers pay this mortgage insurance for the entire term of the mortgage. What is private mortgage insurance?
Ensure that you set aside no less than 1% of the total value of the home in cash. This may become necessary if there is an emergency repair or you need maintenance. You must be prepared for any unforeseen financial challenge you may face along the line. For example, if you lose your job, you need to have enough money saved up to cover your mortgage for no more than six months.
The smaller amount down that you pay, the higher you’ll have to pay every month as PMI until your home has up to 20% equity.
The percentage of your down payment does not affect your lender fees
It doesn’t really matter how big or how little your down payment is, your lender fee remains constant. This happens because lenders are prohibited from charging fees based on the size of down payment. On the other hand, different loan types require various services, and this will affect the total loan closing costs.
How to fund your down payment?
You can fund your down payment through savings, proceeds from the sale of your present home and checking accounts. You can also borrow from your retirement plan. Gifted down payment funds from a relative are also allowed to assist you with buying a home. Most states have down payment assistance programs available for first time home buyers as long as you meet the minimum requirements.
So you know what exactly is involved in a low down payment home loan. It’s time to put things in order so that you don’t get turned down when you make your request.
Talk to an experienced Loan Officer or Mortgage Broker.
Talk to an adviser that can walk you through every step of the process. An adviser would be in the best position to help decide if you are presently in a position to buy a home without a lot of savings built up.
Research on all available federal mortgage programs. You can check in with your local housing authority if you need help.
Consider seller financing and see if it is possible as these usually demand lower down payment.
Be realistic and set responsible expectations.
If you have a bad credit score, improve it.
Avoid credit card pitfalls.
Always have a reasonable explanation for credit troubles.
Dispute every inaccurate information on your credit report.
Practice fiscal responsibility to improve your score.
Devote enough time for your credit to improve your score before you request for the loan. Your credit score should be at least 620 to improve your chances of a mortgage approval.
Now you can start considering the sort of low down payment loan you would prefer. You can go for either of the following;
VA loans. 0 Down Payment Required.
USDA rural development loans. 0 Down Payment Required.
State and local homebuyer programs. Contribution are made by these programs towards the down payment on a house leaving the home buyer with less to come up with.
FHA loans. 3.5% Down Payment
Home Ready mortgage. 3% Down Payment Required. Lower PMI Rates.
Conventional 97 mortgages. 3% Down Payment Required.
You can decide to go for any of the low down payment loan options as long as you are sure you can afford all the fees associated with them. If you do not make a down payment, you will lack equity until you begin to pay off your mortgage or when you home value rises. The low down payment option should only be considered when you have no other way to make the regular down payment.