Myths Abound Concerning Down-Payment Requirements
There are several reasons why there are myths circulating about how much home buyers need to have saved for a downpayment on a home in 2014. Studies by NAR (National Association of Realtors) and other real estate organizations show that half of Americans believe the misconception that you need to put 20% down on a house. This is just not the case.
It’s possible that since the housing collapse of 2007, the many discussions of solutions to, and prevention of, another crisis have left consumers with misunderstandings. There has been a lot of talk by housing authorities about raising the required down-payment, but that has never happened. The reasoning is, with more skin in the game, home owners will be much less likely to walk away from their mortgages.
While that is eminently true, raising the required down-payment to 15% to 20% would put so many people out of the market, it would be devastating to the housing market. That kind of money is just out of reach for the majority of Americans. [that opinion is mine]
As well as the discussions of how to solve and protect against another mortgage meltdown, there is another source of misinformation that we all love to watch… I call it HGTV-ism…it comes from watching too many TV real estate shows! I love to watch them, I admit, but they can sometimes lead many people to false conclusions. So…
How Much Do I Need for A Downpayment on a House?
1. With an FHA guaranteed loan, the required down payment is 3.5%. FHA loans are often the choice of first-time buyers, because of the low down-payment and because the qualification process is based on more than just the credit score. Common sense underwriting will consider your payment history, as well other indicators of credit-worthiness. FHA also requires that the property meet certain minimum standards.
There are rumblings of reducing that down payment requirement to 3% for Fannie Mae and Freddie Mac loans. Many at the Federal Housing Finance Agency are aware of tight credit:
“We know that access to credit remains tight for many borrowers, and we are working to address this issue in a responsible and thoughtful manner…To increase access for creditworthy but lower-wealth borrowers, FHFA is also working with the Enterprises to develop sensible and responsible guidelines for mortgages with loan-to-value ratios between 95 and 97 percent. Through these revised guidelines, we believe that the Enterprises will be able to responsibly serve a targeted segment of creditworthy borrowers with lower-down payment mortgages by taking into account “compensating factors.” ~ FHFA Director Mel Watt
2. With a VA Loan, as always, there is no down payment. This is truly a great way to say thank you to our veterans for serving us. But even with VA loans, there are myths that circulate. Our friends at Inlanta Mortgage have written extensively about the value and benefits of a VA mortgage:
- Five Ways that VA Mortgages Trump Other Kinds of Loans
- VA Joint Loan Options
- VA Mortgage Requirements and Guidelines: A Detailed Look
- VA Refinance
3. Conventional Financing is another option. A conventional loan, sometimes called a conforming loan, is not insured or guaranteed by the federal government. It adheres to the guidelines set by Fannie and Freddie.
A borrower can get a conventional mortgage for 20%, 15%, 10% down, and even for as little as 5% or 3% down, when combined with family gifts or other form of down payment assistance. Every state in the country has some type of down payment assistance program for qualifying buyers.
With a Conventional loan, naturally, the lower the down payment, the stricter the qualification requirements. With a conventional loan, you can often get a lower interest rate.
The 20% limit comes in to play because when a buyer puts down less than 20%, they must purchase mortgage insurance. Once the mortgage gets paid down to more than 20%, the mortgage insurance drops off.
The differences between FHA and Conventional loans can be found in mortgage insurance regulations, qualification requirements and closing costs, as well as other items. Be sure to consult a lender for all the information about lending, loan products and standards today.
In an environment that is constantly changing, having a trusted adviser in real estate and lending is more important than ever. Contact us for a lender referral. 301-401-5119