According to a recent survey, nearly half of renters overestimate the up front costs of buying their first home. Too many believe they need to put 20% or more toward a down payment when buying a home.
That was most likely the case when your grandparents purchased their first home, but that is no longer the case.
While a 20% down payment is still considered standard, it is not the only option. Fortunately, there are loan programs that contain down payment assistance options that are designed to help first-time buyers who have little, or even no cash saved for a down payment.
In fact, there are many programs that allow buyers to put down as little as 3%. Statistics show that 7 out of 10 first tie homebuyers make a down payment of 5% or less and some first-time homebuyer programs offer NO MONEY DOWN. And as many as 15% of those who have purchased homes within the last 2 years have financed with 0% down.
Perhaps the reason for this supposed myth is due to Private Mortgage Insurance. When you finance a home with less than 20% down, you also have to pay PMI every month until you reach the required equity of 20%. This is true of regular conventional loans, but not for FHA loans which can go as low as 3.5% equity.
At first glance this may seem risky, but the Government wanted more Americans to be able to achieve the American dream. To achieve this and boost homeownership, they created the Federal Housing Administration (FHA) and began offering government backed loans that were insured against default (insurance to the mortgage company or bank in case the borrower ever defaulted on the loan). This made lending to borrowers with a lower down payment and credit scores a reality.
For instance, the FHA will back a loan for a borrower with a 500-579 credit score and a 10% down payment. If the borrower has at least a 580 credit score, they only need a 3.5% down payment to qualify for an FHA mortgage (borrower may pay more over time). Conventional loans programs offer down payments between 3% and 5%. Veterans, military service members and eligible surviving spouses can get mortgages with a down payment as little as zero.
In an analysis of historical loan data by Laurie Goodman, Jun Zhu, and Taz George with the Urban Institute shows why government-backed investors like Fannie Mae see relatively little risk in qualifying mortgage loans with down payments as low as 3-5%. The data shows that credit is a stronger indicator of default risk than down payment size. The percentage of defaults of 5-10% down loans versus 3-5% down is very similar.
“Of loans that originated in 2011 with a down payment between 3-5 percent, only 0.4 percent of borrowers have defaulted. For loans with slightly larger down payments – between 5-10 percent – the default rate was exactly the same. The story is similar for loans made in 2012, with 0.2 percent in the 3-5 percent down payment group defaulting, versus 0.1 percent of loans in the 5-10 percent down payment group.” – Urban Institute
If you’re in the process of buying a home for the first time, you probably have some questions about the best way to find and finance your dream home. At MortgageRight, our goal is to make sure you have the education and support you need. That starts with dispelling many common myths about mortgages and home buying.
Please contact MortgageRight at 205.776.8401 or Contact@belair.mortgageright.com for more information.
