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. Studies by NAR (National Association of Realtors®) 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 2008, 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 hasn’t 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.
Fannie Mae recently announced 3% down payment mortgages to help first-time homebuyers who can’t afford a large down payment but would otherwise qualify for a mortgage.
“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. For instance, did you know that a VA loan can be used more than once? There is also no required mortgage insurance, even though the loan is for more than 80% of the value of the property.
Our friends at Inlanta Mortgage – Madison have written extensively about the requirements, 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
With both VA Loans and FHA guaranteed loans, the buyer must occupy the home as their primary residence. Both loan types make it possible for borrowers with less than perfect credit to get a loan. Emphasis is placed on the most recent 12 months of credit history. Even so, VA mortgages have the lowest rate of default among all mortgage types.
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 Mae and Freddie Mac.
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 private 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.
Where Can I Get Money for A Downpayment on a House?
Many people who would like to be in the market to buy a new home are wondering where they will get the money for a downpayment. Following one of the worst recessions in our history, the average American’s savings are at the lowest in 75 years. There are ways to get closing cost help which are allowable by FHA:
FHA will allow for a homebuyer to receive the down payment as a “Gift” from a family member or non-profit organization. There are county and state non-profit programs which you may qualify for. If you are receiving a gift, you must provide the complete papertrail of the money, including the giver’s bank statement, to prove they had it to give.
Employer, Local and State Funds
There are several non-profit sources for closing cost help. Many employers offer programs that match funds, city, county, and state employees have access to programs. The Maryland Mortgage Program is one such program with generous limits and terms.
Grant America Program is a government grant program that provides anyone who qualifies for an FHA loan with a down payment grant to be used towards the purchase of a home. The US Dept. of Housing and Urban Development has lists of programs that assist with downpayment costs.
The IRS discourages people from withdrawing money from their retirement funds early by levying a 10% penalty. Except for a 401K account. An option with a 401k is to take out a loan. Your loan can be a minimum of $10,000, up to $50,000 or half the value of the account, whichever is less. If you must borrow against an account, you must be able to qualify with the monthly repayment amount. The interest rate will be a bit higher, but you’ll be paying yourself. There are pros and cons to borrowing from your 401K.
If you are buying a home with a conventional loan, then there are no laws keeping the seller from contributing to closing costs. Different loan programs have different allowances, though, so you’ll want to shop around. I read a statistic recently that said that the average consumer spends 15 hours in research when buying a car, and only 5 hours in research when shopping for a home loan.
For more information, talk to your lender about the types of assistance that may be allowable, and search for available programs on sites such as Down Payment Resource™.