This keeps coming up in conversations I have with people so I want to address this new myth right now. NO. NO NO NO. You DON”T NEED 20% down payment to buy a house. Clarifying this further….you CAN get a CONVENTIONAL loan with LESS THAN 20% DOWN TOO!!
Okay, I will stop raising my voice, but seriously, you need to know this. The media and self professed financial gurus are claiming that with the recent financial “crisis” and reform, homebuyers now need 20% downpayment.This is just not true. The best alternatives (in my opinion) that exist TODAY for buying a home with less than a 20% downpayment are:
1. 95% Conventional Financing – For home buyers that plan to stay in their new home for approx 3 years or more, this is a great option. There is mortgage insurance which is added into your monthly mortgage payment unless you have a 20% downpayment or your loan balance is less than 80% of the market value. However, a neat option is to “prepay” this mortgage insurance. Often, the cost to prepay it will save you money after 2-3 years. The benefit to this strategy is that you don’t have that pesky monthly mortgage insurance (approx $200 on a$200k home). An even cooler trick is to have the seller pay this prepaid mortgage insurance OR the lender can pay it for you as well. A good mortgage lender can go over these options with you and come up with a strategy that is best for your situation.
2. FHA Financing – For home buyers than can’t come up with the 5% downpayment above, this is the next best option. FHA is a loan insured/backed by the Federal Government (HUD – Dept of Housing and Urban Development). The benefit to an FHA loan is the downpayment is 3.5%. The downside is there is that pesky monthly mortgage insurance AND an upfront mortgage insurance premium (I call it a fee) that is added to your loan balance. The downside to this is that your payoff is higher than the conventional option above and you’re monthly payment is higher since it includes the monthly mortgage insurance. However, you need less $$ for a downpayment.
3. FHA Financing – 15 year Loan – This is similar to the FHA product above, however, it is calculated over 15 years instead of 30. The monthly mortgage payment is higher but the is not any mortgage insurance so the payment often doesn’t increase that much. A good lender can give you specific details on how this works and what payments look like. For borrowers that want to be on a fast track to paying off their home and can afford a slightly higher monthly payment, this can be a great option too.
The moral of the story….don’t believe the hype…and if you or someone you know is considering buying a home…talk to a mortgage professional about your options and don’t just “assume” you can’t buy a home because you don’t have 20% downpayment saved up. If you need a referral to a top mortgage professional call me at 303-669-2744 x 5 or email me. My info is at the top of this web page.