The truth is you can buy a home with a much smaller down payment - more like 3.5% to 5% for certain mortgages. So let's go through downpayments and clear up the mysteries of this little-understood part of buying a home.
What is a downpayment?
It’s a percentage of your home’s purchase price that you’re going to pay for in cash at closing. Typically, a down payment ranges from 3.5% to 20% of the purchase price.
Can you make a downpayment with a gift from a family member?
Yes, you can! Talk to your loan consultant about that as soon as you can. You'll most likely need to have a "gift letter" from the person providing the funds clearly stating that the money is truly a gift and not a loan.
What's the lowest downpayment option?
For non-Military home buyers, an FHA loan usually offers the lowest downpayment amount of 3.5%. But even though FHA loans come with a low downpayment, they may not be your best option. FHA loans require an up-front mortgage insurance premium (PMI.) Your home loan consultant will be able to help you weigh the pros and cons of this option.
If you’re active-duty or retired military, you can qualify for a VA mortgage, which comes with 0% downpayment options and no Private Mortgage Insurance. That’s great, but there are some “strings” attached. You will most likely need to pay what’s called a funding fee on your VA loan, which can be rolled into the total loan amount. The amount of the funding fee will depend on if you’ve ever used your VA benefit in the past.
If you have very good credit you might consider a 5% down Conventional mortgage. This can get you into a home with a competitive interest rate without requiring a ton of cash at closing. This option will require PMI, too, but the amount will be less than required for an FHA loan.
So, why does everyone say you need 20% down?
Because traditionally, you can get a lower interest rate the more you put down. The larger percentage of your home's price you have as a downpayment, the lower the risk is to a mortgage lender.
Also, if you put 20% down, you can avoid paying for Private Mortgage Insurance (PMI). Check out our blog post about PMI here.
Let's talk about your options
Nothing is "set in-stone" when it comes to downpayment choices! We have plenty of options available and your loan consultant will help you make the best choice for your situation.
Apply online today for free and let's get started!