John Reuter, Broker/Owner – The Reuter Team
In this down payment article:
Sub-20 percent-down mortgage options: Six ways you can buy a home with little or no money.
Closing costs: How to deal with fees above and beyond the down payment itself.
Down payment pros and cons: Why it’s often better not to make a down payment, and when you might want to.
You don’t need a 20 percent down payment
The 20 percent down payment myth has stopped many would-be home buyers from owning a home.
It’s a left-over idea from generations ago.
So-called financial experts, parents, college professors, and even real estate professionals pitched 20 percent down as a wise move. But is it?
Making a large down payment on a home can put you at more risk than making no down payment at all.
Plus, many programs in Wisconsin waive the down payment requirement.
Still, today’s home buyers are the unfortunate recipients of wrong information. What will it take for them to disregard the mythical 20 percent figure?
If you’re reading this (and are willing to read it until the end), you’ve proven that you are ready to reach a higher plane of home buying wisdom.
Can I buy a house without 20 percent down?
The simple answer is yes.
In fact, the massive upfront cost is not even typical. The average down payment for first time home buyers is just 6 percent according to the National Association of Realtors. However, in our local area we see about 60-70% of first time home buyers utilizing government loans (FHA, USDA, and VA loans – require between 0-3.5% down).
The 20 percent down payment myth is circulated to this day because you need 20 percent down to avoid mortgage insurance with most conventional (non-government) loans. But, as many homeowners have discovered, PMI is not bad. In fact, many buyers in previous years have made $13,000 per year by investing in PMI.
Since the advent of FHA loans in 1934, mortgages have not required 20 percent down. That was more than 80 years ago!
The following are ways in which you can buy a home with little down payment available, or even if you have no money at all.
The FHA mortgage requires just 3.5 percent down. But most first-time buyers don’t know that the down payment can be sourced from a financial gift or approved down payment assistance program.
VA mortgages require zero down. Plus, they require no monthly mortgage insurance, helping you buy more house for less money. 100 percent of the closing costs can come from a seller concession or via gift funds from family. Those with current and former military service are likely eligible. In addition, they Veteran’s are eligible for savings through the Homes for Heroes Program. Homes for Heroes rewards Heroes for their service by providing them with significant savings from the Realtor, Lender, Home Inspector, Title Company, and various other real estate services. The Reuter Team is the premier Homes for Heroes team in Wisconsin. We can be contact at 608-834-3341 for more information or e-mail email@example.com
Conventional loans offer down payments as low as 3 percent.
USDA home loans require no money down. Property eligibility is location-based. In South Central Many areas qualify for USDA home loans. In Dane County several a few of the areas that qualify are Deforest, Oregon, Stoughton, and Waunakee. Most homes in Columubia and Dodge County also qualify for USDA. The loans are backed by the United States Department of Agriculture and offered by most mortgage providers nationwide. These loans are not for farms, but for typical single-family homes that happen to be in less-dense areas. USDA loans are available in every state. Contact us for a list of areas in Wisconsin that are eligible for a USDA loans
5 percent down mortgage
For buyers purchasing their primary residence, not a second home or rental, many programs allow down payments of just five percent. Both Fannie Mae and Freddie Mac allow this.
10 percent down mortgage
If you can come up with 10 percent down, you have more programs available — especially if your credit is less than pristine or your debts are on the high side. FHA, for instance, will allow a FICO score as low as 500 if you put 10 percent down.
Piggyback loans require between five and ten percent down. Typically, you get an 80 percent first mortgage, a 10 percent second mortgage and put ten percent down. This eliminates the need for mortgage insurance. Piggyback loans, also known as 80/10/10 or 80/15/5 loans, are best for those with good credit and at least 5 percent down.
Down Payment Assistance (DPA) programs are becoming more popular by the day. Government-run programs, plus approved non-profits, offer gifts and no-interest loans to support homeownership in select communities. Nearly 90 percent of all single-family homes in the U.S. are eligible for some kind of DPA according to a study by RealtyTrac. All the major loan types mentioned above allow the borrower to apply DPA funds toward the required down payment, if any, and in some cases, closing costs.
Law Enforcement, Firefighters, Military, Medical Professionals, and Teachers save thousands when they buy or sell a home!
What about closing costs?
Keep in mind that you will pay closing costs even if you select a loan program with no down payment requirement.
Closing costs can range from 1 percent-4 percent of the home’s purchase price depending on many factors, such as your lender fees, property taxes, and escrow fees. The following are ways to help you pay for closing costs. You can realistically buy a house with no money if you get closing cost assistance in combination with a no-down-payment loan.
Closing Cost Credit for being a community Hero
Community Heroes such as, Police, Fire, Medical Professionals, Teachers, and Military save thousands on their home purchase. The average Hero saves over $3,000! To learn more visit www.wiheroes.com or you can contact the Wisconsin Homes for Heroes affiliate: John Reuter at 608-669-4226 or firstname.lastname@example.org
Lender credits help with closing costs
Request a lender credit in return for a slightly higher mortgage rate. The credit helps pay your mortgage closing costs and can even be applied to prepaid property taxes and other fees.
Seller concessions reduce or eliminate closing costs
The seller can issue a closing cost credit to pay for all or part of the buyer’s closing costs. Seller concessions are more available in markets that favor the buyer.
Down payment assistance can go toward lender and closing fees
Some mortgage types allow you to pay 100 percent of your closing costs with a down payment assistance program from a government or non-profit entity.
4 Reasons It’s Better Not To Put 20 percent Down
More cash available. It’s always a good idea to have cash on hand in case of a job loss or other unforeseen financial event. Those who put all their liquid assets into a down payment have no buffer to weather the storm.
Buy sooner. Home prices are rising about 5 percent per year. That’s $10,000 annually on a home costing two hundred thousand dollars. Waiting to save for a down payment leaves you chasing higher home prices.
Invest elsewhere. You could deplete your 401k for a down payment. It’s allowed. However, you’re probably better leaving retirement funds intact, or continuing to invest there. Removing funds for a down payment severely limits compound interest you could have earned. You might regret it at retirement.
PMI is actually a good investment. You might hear advice that you should put 20 percent down to avoid mortgage insurance. According to our research, PMI is a good investment yielding a 530 percent return over the past five years. Ask yourself this: would you pay $8,100 to get a paycheck of $43,000? That’s exactly what PMI holders have done over the past half-decade.
3 drawbacks of making a small down payment
Mortgage insurance. Yes, it’s an extra cost. As mentioned above, though, it’s can be a good investment.
Higher mortgage rates — maybe. Making a small down payment typically only increases your rate for conventional loans. However, low down payment government-backed loans like FHA, VA, and USDA all come with lower rates than a conventional mortgage with 20 percent down.
Less equity. You will have less equity in the home if you make a small down payment. Arguably this is not a downside at all. Imagine the housing market turns south. Your home loses 20 percent of its value. Would you rather have lost your own money, or the bank’s?
How do I check my low down payment eligibility?
Your eligibility for a zero-down or low-down payment loan is available by talking to a lender or submitting your application online for review. Contact us for a list of super awesome lenders that we work with and they can provide you a variety of customized options to fit your unique situation.
Within a day, you will likely know if you qualify. The lender reviews your income, credit, and other factors to determine your eligibility for certain programs. You choose which is best for you.
You might be surprised at what you qualify for.
It’s a terrific time to be a home buyer. Home values are rising in many U.S. markets; mortgage rates are about half their historical average; and, there is an abundance of low- and no-down-payment mortgages available for today’s buyers.
Get mortgage rates for loans with less than 20 percent down
Compare today’s mortgage rates and verify what you’ll qualify for. Complimentary rate quotes are available with no obligation to proceed, and with no social security number required to get started.
If you would like more information on local lenders, the Homes for Heroes Program, or the home buying/selling process please complete the contact us section below. – Thanks