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You’re ready to break free from the renter’s market and purchase your very own home. But how much money do you really need for a down payment? Many people believe that you have to put 20% down to even qualify for a home, but that simply isn’t true in this day and age. There are many types of loans out there that require as little as 3% down, and some loans require nothing at all! Talk to an experienced Mortgage Lender at American Bank & Trust to figure out your loan and down payment options.
What is a down payment?
A down payment is the amount of money you spend upfront when you purchase a home. It is usually combined with a home loan to make up the total purchase price of the house. Your down payment is one of the factors that influence how much of a loan you can qualify for. Other factors include your credit score, credit history, total debt, and annual income.
Standard down payment options
When it comes to buying a home, the more money you put down up front, the lower your monthly payments will be. Most lenders in the mortgage industry consider a 20% down payment as the standard for financial strength. That translates to $50,000 if you are trying to purchase a $250,000 house. There are several benefits to making a 20% down payment, including:
- A higher chance at getting approved for the loan
- Lower upfront fees
- Lower ongoing fees
- More equity in the home to start
- A lower monthly payment
However, the down payment is not the only money you will need to provide before closing. There are also closing costs and earnest money to consider. But don’t take yourself out of the running if you don’t have that much cash on hand. Fortunately, there are a variety of loan options out there that require lower down payments in order to qualify.
Low down payment options
The Federal Housing Administration (FHA) is dedicated to helping people get approved for a home loan, especially if you are a first-time homebuyer. This government agency assists mortgage lenders by guaranteeing a portion of the balance of the loan, which allows you to put less money down up front – as little as 3.5%, in fact. That’s just $8,750 on a $250,000 house. However, there is a catch: an FHA loan comes with a monthly mortgage insurance payment.
The government-sponsored companies Fannie Mae and Freddie Mac also have low down payment options that require only 3% down.
Another popular choice for many homebuyers is using a conventional loan with a 5% down payment. While the difference between a FHA and a conventional loan may only be 1.5%, you can get rid of the monthly mortgage payment (once you have accumulated 20% equity in your home).
The skinny on mortgage insurance
Many low-down payment loans require mortgage insurance in addition to your mortgage payment. Mortgage insurance is an insurance policy which compensates the lending institution for losses if you should default on your mortgage loan. The insurance is paid monthly. FHA loans will always have mortgage insurance while conforming loans only have mortgage insurance until you reach 20% equity in your home. Without mortgage insurance, lenders would not be able to offer low down payment loans.
Zero down payment options
Believe it or not, there are actually loans out there that require no down payment! The caveat? The qualifications are very specific.
- If you are active or retired military, then you can qualify for a zero-down-payment VA loan through the Department of Veterans Affairs. VA loans do require a funding fee, which is paid upfront, factored into the loan amount, or obtained through a higher interest rate.
- If you live in a rural area, you may be able to qualify for a zero-down-payment loan through the Department of Agriculture’s Rural Development program.
The bottom line
The 20% down payment rule is not set in stone, and you don’t need a massive down payment to qualify for a home. Talk to one of the mortgage loan experts at American Bank & Trust to see what your down payment may look like and which loan types fit you best!
Get prequalified for your home loan by contacting us today!