If you’ve begun saving up for the down payment on a home, and if you’ve mentioned your goal to friends and family, you’ve probably been getting plenty of advice.
Some of it, of course, is good advice. For instance, Mom or Dad might tell you that small savings do add up – so skip the morning stop for coffee and brew yours at home. Also, skip the visits to the local café or deli and take your own lunch to work.
Other advice you’ll get is not so good. In fact, some of it is pure myth. For instance:
You must have 20% down.
Once upon a time that was mostly true. Today it is not. Today’s truth is that if you want to avoid paying mortgage insurance on a FHA or Conventional loan, you must have 20% down.
FHA (Federal Housing Administration) loans require only 3.5% down, while a VA (Veterans Administration) or USDA (United States Department of Agriculture) loan can be approved for 0% down. Conventional loans can also be approved with less than 20% down, but you will pay for Private Mortgage Insurance (PMI).
What is PMI? It’s insurance you buy to cover the lender’s loss in the event that you default. It does not insure your interests in any fashion. The cost, which is added to your monthly payment, is generally ½ to 1% of the loan amount. On a $200,000 loan with a 1% PMI fee, a borrower would pay an additional $2,000 per year, or $166.67 per month.
It’s smart to pay as little down as possible, even with PMI.
The theory is that even if you have the money to pay 20% down, you should pay as little as possible and keep your cash in the bank for emergencies. There’s some value to that idea, but do calculate the cost before making a decision. That extra $2,000 per year in the example above could be going back into a savings account.
You should also consider the type of loan you’ll be getting.
If yours is a conventional loan, the PMI will “fall off” when your principal balance drops to 78% of the purchase price. If it’s an FHA loan, the mortgage insurance will remain until the house is paid off or you refinance into a Conventional loan with at least 20% equity.
You should never pay more than 20% down.
Some will say “Why pay more than you have to?”
For two very good reasons:
- First, the less you owe, the smaller your payment will be and the less you’ll pay in interest over the years.
- Second, making a higher down payment can lower your interest rate, which also means you’ll have a smaller payment and pay less interest in the long run. The interest rate should drop with 25% down, and drop even more if you can pay 35%.
It’s easy to get assistance with your down payment.
Sorry – that’s not true. Assistance can be had in some cases, but it’s not “easy” to locate those assistance programs, nor to qualify for help.
There are no national assistance programs, and there are very few state-run programs. Most are locally run, sometimes by a county or even by a city. The Department of Housing and Urban Development lists a few options, but you’ll have to dig to find them.
It never hurts to ask, however, and a top real estate agent will know about any programs specific to his or her area.
In most cases, you’ll have to be under a certain income to qualify for assistance – usually the median income in your County. Special circumstances, such as single parenthood or employment in specific occupations, may apply. Some programs add additional requirements, such as the number of hours per week you work, or your credit scores.
“No problem – just borrow the money for the down payment.”
This one NEVER works. For one thing, that loan would simply add to your debt to income.
You CAN get help – but it must be in the form of a gift. Depending upon the loan program, your benefactor can provide some or all of your down payment and possibly all of your closing costs.
The rub is that the benefactor must sign a gift letter swearing that the money is a gift, not a loan. Of course you and they can lie – but you do so at your great risk. Lying on a mortgage application is a felony.
The bottom line: If you plan on buying a home in the future, begin building your down payment funds right away.
Mom and Dad are right – small savings do add up, so if you‘re willing to make the effort, you can have that money saved faster than you might think possible.
Most of us do spend money on things that are “unnecessary,” like eating out, going to concerts, and buying that extra pair of shoes that caught your eye.
It’s a matter of deciding what matters most to you. If you’re focused on home ownership as your long term goal, eliminate the unnecessary and watch your bank account grow.
Would you like to know what kind of loan you could get right now, with the money you currently have at your disposal? We at Homewood Mortgage, the Mike Clover Group, would be pleased to chat with you and show you the possibilities.
When you’re ready, we’ll also be happy to get you pre-approved for a loan, so you can shop with confidence.
Call today: 469.621.8484