For many first-time buyers, saving to get a down payment is considered the most difficult step in the home-buying process. However, it’s really a common misconception that you need 20% down to purchase a home.
Actually, lenders throughout the country offer mortgage products with very affordable down payments – some as little as 3 %.
Owning a home has long been a key component of the American Dream; the truth is, many surveys show that 65 percent of Millennials agree that home ownership and the American Dream go hand-in-hand. Home ownership also comes with several advantages like building equity, receiving annual tax deductions as well as becoming more engaged together with the local community. It serves as a stepping stone for long-term wealth creation, too. Historically, first-time buyers have represented 40 % of all home purchasers, but today they make up about 30 %, based on the National Association of Realtors. Down payment misconceptions could be to blame.
“It’s safe to say that most first-time buyers aren’t aware that there are reasonable loan options available that require less money down,” says Geoff Lewis, president of RE/MAX, LLC. “Choosing an option with a smaller down payment can make it possible for potential buyers to enjoy the benefits of home ownership sooner.”
Most popular low down payment options
* FHA Loans – Traditionally the mortgage of choice for first-time buyers, the Federal Housing Administration (FHA), offers government-insured loans with as low as 3.5 percent down. The most popular FHA loan option, the 203(b), is widely available from lenders throughout the country. You could qualify with a credit score of just 500, however, there could possibly be limitations on some condo purchases.
* Home Possible from Freddie Mac – This program enables you to put between 3 and 5 percent down, as long as you intend to use the purchased house as your primary residence, and don’t currently own or share ownership of another house. You’ll also have to complete a required home ownership education program online.
* Conventional 97 from Fannie Mae – Just 3 percent down is sufficient to help you be eligible for a a Conventional 97, as long as you’re applying for a fixed-rate mortgage on a single-family home that’s under $417,000. Then of course you’ll have to attend a home ownership education program, and at least one of the purchasers applying for the loan must be a first-time buyer.
* HomeReady from Fannie Mae – Another option that will require as low as 3 % down, HomeReady can provide below-market interest rates. This program also allows non-occupant borrowers to apply; as an example, parents can secure this type of loan for a young adult, who’s beginning to establish credit.
In addition to these mortgage options, there are also various down payment assistance programs that may be available by your state or lender. Today, many loan programs permit down-payment funds to come from third party sources, like cash gifts from relatives.
Purchasing a home with a smaller down payment has distinct advantages too. You’re less inclined to become “house poor,” which can happen if you spend the majority of your total savings on home ownership, leaving little cash in reserve for unforeseen emergencies or desirable home improvements.
Something to remember when thinking about your loan options: putting under 20 % down can also result in the added monthly expense of Private Mortgage Insurance (PMI). However, if your home value is appreciating, PMI can be eliminated in a few years through refinancing.
“Home ownership isn’t reserved exclusively for people who can afford a large down payment. Mortgages that offer an alternative for less cash down are making it feasible for many to enjoy the American Dream,” Lewis says. “Mortgages are like any other product, you have to shop around to find the one that works best for you. Lenders and real estate agents can give you a good idea of what your choices are.”
First-time buyers: You’re closer to a down payment
than you think
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