How much of a down payment do you need?

Can't put 20 percent down? You still have options for affording a home loan.

By MSN Real Estate partner Aug 25, 2014 11:54AM

Fancy/AlamyBy Scott Sheldon, Credit.com

 

Looking to get your foot in the door (of your new home)? If you're a renter who's tired of paying someone else's mortgage, now may be the time to pursue the American dream of

homeownership. In fact, the days of needing a 20 percent down payment are long gone. While you can always elect to put down the full 20 percent or more, there are now many alternatives available. Here's what you want to know if buying a house is in your future.

In the mortgage industry, 20 percent down is considered the benchmark down payment for looking strong on paper as a homebuyer. While this a general standard for financial strength, it is by no means a requirement, nor is it necessarily expected.

 

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However, keep in mind that your purchase-offer amount – your buying power — drives negotiation. How strong you are on paper does help, but when you make an offer to buy a home, the seller of the property has no idea of your financial strength other than what your real estate agent tells them and what's on your pre-approval letter. The price dictates whether you're in the game for the house, or whether you'll continue to be on the search.

 

Down payment options

So let's say you don't have 20 percent down for a home. While there are many benefits to having more equity in the home you're buying, that doesn't mean you're out of the running for becoming a homeowner. There are options for lower down payments.

3.5 percent down

For a Federal Housing Administration loan, the minimum down payment you would need to buy a home is 3.5 percent down. Most lenders can lend up to $417,000 with the exception of Alaska, Hawaii and Guam. An FHA loan comes with a monthly mortgage-insurance payment, which can make it more expensive than a conventional mortgage.

 

In some more affluent markets, the higher loan amounts (per county) allow someone with strong income and less cash to still get into the market.

 

5 percent down

Another popular choice for buyers is using a conventional loan with 5 percent down. There are loan size amounts up to $417,000 (with the exception of Alaska, Hawaii and Guam) going as high as $417,000 with as little as 5 percent down. An alternative to the higher-priced FHA loan, the conventional loan allows for getting rid of the private mortgage insurance after accumulating 20 percent equity after a minimum of 24 months.

0 percent down

Two options exist for 0 percent down financing, one being through the U.S. Department of Veterans Affairs. The program allows a veteran to purchase a house for literally no money down. Yep, the purchase price and loan amount are equal.

 

The caveat? Actually, there are two: The program is for military veterans only, and the home must pass a clear pest report. This option could be optimal for brand-new construction or for property where any pest damage can be fixed in time for closing.

 

An alternative to this program is a loan guaranteed by the U.S. Department of Agriculture, USDA. You need not be a veteran for this particular loan, however in some areas, you may not be eligible to use the program because of tighter qualifying income-to-payment ratios and location. The program also only works for homes designated rural by USDA. Additional income limitations also apply. For example: For a family of four, a household income cannot exceed $96,400 per year.

All of these options allow for the use of gift funds. Family members, cousins, relatives – these are all excellent sources to tap for possible down payment or closing costs (usually about 2 percent of the home price). Even if you already own a home and are looking to upgrade, all of these programs could present a viable option to bridging the gap between buying a home for the right price in the right area of versus continuing to be on the search.

 

Boost your buying power

Mortgage tip: If you qualify for a smaller loan size, it could be more challenging to actually close escrow on your first home. Buying power is important, especially when negotiating in competitive markets. Pure and simple, the bigger the loan you qualify for, the more opportunity.

Conventional conforming loan: With conventional loans, you can get 95 percent financing up to $417,000. In counties where the maximum conforming loan limit is higher than $417,000, you can have up to 90 percent financing. For example: In Sonoma County, Calif., the maximum high-balance loan limit is $520,950. A loan exceeding $417,000, and up to $520,950, would require a 10 percent down payment.

 

VA loan: This type of loan allows for 100 percent financing all the way through the maximum conforming loan limit in the county in which the property is located. In fact, this type of loan can allow for even higher than the maximum conforming loan limit if you do have a down payment.

 

Here's how: The buyer would need a 25 percent down payment only on the amount greater the conforming loan limit. For example, with a $520,950 loan (the maximum loan limit for Sonoma County) with a purchase price of $700,000. The difference is $179,050 – and the buyer would need to put down 25 percent of that difference — $44,763 – in order to get the additional VA loan financing.

 

USDA loan: These loans allow for financing up to $417,000, but here's the kicker: A buyer would need an income of $95,000 to qualify for a $417,000 loan — which is getting very close to the USDA loan maximum income limitation of $96,400. More importantly, lending qualifying ratios are more stringent for this program than any other. To qualify for this loan, your proposed house payment before debts cannot be more than 29 percent of your gross monthly income, and the house payment plus other debts cannot be more than 31 percent of your gross monthly income.

 

FHA loans: An FHA loan will allow for as low as a 3.5 percent down payment up to the maximum conforming loan limit in the county in which the property is located.

Jumbo loans: These loans usually can go as high as $750,000 with as little as 10 percent down.

 

Remember: When you're putting less than 20 percent down on a home, your monthly property taxes and fire-insurance terms are required to be built into your monthly mortgage payment, and you'll likely pay private mortgage insurance, too. Some lenders might offer an alternative option called lender-paid mortgage insurance — where the lender actually pays the monthly PMI, despite not using 20 percent down to purchase a home. Make sure to do your homework, and talk to your lender so you know what your options are.

 

Of course, it's always important to have your credit in the best shape possible. Before you start your home search, give yourself time to work on your credit so that you can qualify for better rates. Check your free annual credit reports for errors or any problems that could be hurting your credit scores.

 

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7Comments
Aug 26, 2014 5:21AM
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Lenders should require enough of a down payment  to ensure you can't back out of your promise to pay without a substantial financial loss. That traditionally has been 20%, none of which can be  a loan from others (like parents). When lenders get away from this requirement is when you have buyers walking away from homes. The little or no down  borrower  is a speculator who cashes in if values go up and sticks the tax payer with the loss if values go down. Lenders make a quick buck on loan points and fees then dump these loans to federally insured financial institutions.  So it's the tax payers who eat all those deadbeat  bad loans that amount to billions of dollars each year. Once the Gov't refuses to buy or insure little or no down loans (other than V.A.), these high risk lending practices will come to an end.
Aug 26, 2014 4:14AM
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My next home will be purchased with cash--dealing with a lender was unpleasant.

I'm glad my daughter paid cash for her home--she was 33 when she purchased it--her closing took less than 10 minutes as there was hardly anything to sign.  She's been spending the money she would have wasted on interest to change things around the house, buy new furniture, etc.  We're just finishing up refinishing the wood floors and she'll be able to move in once the floors are all good-n-dry :)

Aug 26, 2014 4:00AM
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20% is a tough nut to crack.  I bought (built) my first home last year.  My credit was stellar (all 3 right around 800), but I was only able to bring about 17% to close.  I could have put down 20%, but I wanted to keep my 3-6 month safety net in savings.

I got a 15-year fixed (2.75%...woohoo!) and luckily got in before the FHA PMI requirements had changed, so I was able to get rid of PMI after around 8 months.
Aug 25, 2014 1:48PM
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Put down the least you are allowed to and hoard the rest in savings so you can continue to make house payments if your finances take a hit.
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