In the mortgage industry, a 20% down payment is considered the benchmark for a buyer’s financial strength. While paying a down of 20% or more certainly makes a home buyer look financially strong on paper, many are not aware that this isn’t a requirement by any means, and there are many available alternatives nowadays that make it easier for anyone to buy a home.
Buying power is what drives negotiations
What you need to keep in mind however, is that your purchase offer amount reflects your buying power, and this can affect negotiations. Looking financially strong on paper is indeed an advantage, but when you make an offer on a property, the only way for a seller to gauge your financial strength is through advice from your real estate agent, as well as the details found on your pre-approval letter.
The property’s price will always dictate whether you’re a potential candidate for owning the home, or whether you’ll have to continue your search.
What is a down payment?
A down payment is the amount of money a buyer pays upfront in order to purchase a home. It is typically combined with a home loan in order to fulfill the home’s total price. Along with the down payment amount, other factors such as annual income, credit score, credit history, and total debt will also be factors that influence the type of loan a buyer can qualify for.
How much do I need?
Buyers typically need 5% to 20% of a home’s sale price in order to be approved for a conventional loan, such as a 30-year fixed mortgage. Mortgage insurance is required for buyers who put down less than 20%. Depending on the type of loan you qualify for, the mortgage insurance can either be public or private.
While paying a 20% down does give you more equity in the home you’re planning to purchase, there are several loans that offer much lower down payments.
Here’s a look at some of them:
0% down payment
Buyers who meet eligibility guidelines may qualify for home loans that offer 0% down payment through a Veterans Affairs or VA loan or through the Department of Agriculture’s loan programs.
To find out whether you qualify, take a look at the Veterans Affairs website or the USDA website.
3.5% down payment
The Federal Housing Administration offers loans that require only 3.5% and a decent credit score in order for a buyer to qualify, making it an excellent option for first-time homebuyers. FHA loans are also federally insured to lessen the risk of loss, in case the borrower defaults on his or her mortgage payments.
However, FHA loans require a monthly mortgage insurance payment, which can make it pricier compared to conventional mortgages.
5% down payment
There are also conventional loans that offer 5% down, which is a great alternative to the more expensive FHA loan. Buyers with a conventional loan also get the benefit of doing away with private mortgage insurance payments after they accumulate 20% equity after 24 months or less.
First Time Buyers
First time buyers have a number of special programs that reduce or eliminate the down payment altogether. Which one will work best for you will depend on your circumstances. The one thing they all have in common is they need fair credit scores (generally 640+, though there are two programs which will accept scores as low as 620). NOTE: Lenders use the middle of your three scores. (See also https://zubekhomesandloans.com/first-time-buyer-assistance-programs)
Do you need more information? Is there some special circumstance(s) we need to take into account? Get in touch (760-622-5087 or [email protected]) and let’s discuss this in-depth.