Contrary to common misconception, a down payment is often much less than many believe.
“More than 6 in 10 (62%) Americans believe you must put at least 20% down in order to purchase a home.”
When potential homebuyers think they need a 20% down payment to enter the market, they also tend to think they’ll have to wait several years (in some markets) to come up with the necessary funds to buy their dream homes. The report continues to say,
“The truth: 32% of current U.S. homeowners put 5% or less down on their home, according to census data.” (as shown below):
The lack of knowledge about the home-buying process is, unfortunately, keeping many motivated buyers on the sidelines.
The minimum down payment to buy a home required for a conventional loan that conforms to Fannie Mae or Freddie Mac guidelines with a loan amount up to $417,000 is just 5 percent of the house’s purchase price. If the amount is larger than $417,000, the down payment can be as low as 10 percent.
“Most lenders have jumbo loans with a little bit over 10 percent down payment available in the marketplace.”
Even smaller down payments are allowed for conforming loans, like Fannie Mae’s 3-percent program,.
The minimum down payment to buy a home with an FHA loan is just 3.5 percent of the home’s purchase price. That means the down payment for, say, a $250,000 home would be just $8,750 with this type of loan. FHA loans are insured by Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD), a federal government agency.
VA loans, guaranteed by the U.S. Department of Veterans Affairs (VA), and USDA loans, backed by the U.S. Department of Agriculture, don’t require a down payment at all, which means buyers can buy a house with very little cash upfront. The VA loan is open to most active-duty military personnel and U.S. military veterans, among other groups. The USDA loan is available in rural and outlying suburban areas.
Conventional, FHA, VA and USDA loans all allow at least part of the buyer’s down payment to be a gift from a family member or funds from a down payment assistance program. With FHA, 100 percent of the down payment can come from gift funds, and with the 5 percent down conventional, all 5 percent can be a gift.
Low-down-payment home loans typically involve mortgage insurance or a funding fee. The insurance is paid monthly. The fee is paid upfront, but can be financed as part of the loan amount or through a higher interest rate.
FHA will always have mortgage insurance. VA will have a funding fee. Conforming loans will have mortgage insurance, until the point that you put down 20 percent. At 80 percent loan-to-value, mortgage insurance is no longer necessary.
Without mortgage insurance, lenders wouldn’t be able to offer low-down-payment loans and borrowers who don’t have a lot of cash wouldn’t be able to purchase a home.
The bottom line is that most people don’t need a big down payment to buy a house — and some don’t need any down payment at all. Don’t let a lack of understanding keep you and your family out of the housing market.
The only way to find out for sure is to talk to a lender. “A lot of people have the income and means to buy a new home and are stuck on the notion, for whatever reason, that they can’t do it. I think most would be surprised that they actually could qualify.
Don’t hesitate to reach out today to discuss your options