By Brian Murphy, Senior Loan Officer, MVB Mortgage
For generations the accepted norm to purchase a home, you must have a 20% down payment. This remained true throughout the 20th century as homeownership rates in the U.S. grew steadily. Thirty years ago, the average down payment on a home purchase was 23%. The median home price at that time was also approximately $75,000.
Since then home prices have increased drastically. The rate at which home values have increased has greatly out-paced wage growth as well as inflation. It has become more expensive to purchase a home. However, that does not mean purchasing a home is bad decision. Most financial experts will agree that owning a home is one of the (if not the) best ways to gain wealth. As home values increase, rent prices typically follow close behind. So, rent is not cheap these days either. And as you’ve probably heard before, when you rent you are paying someone else’s mortgage. Buying a home remains a sound goal. And saving for a down payment is the biggest piece of that puzzle, along with establishing good credit and a stable career position.
But that 20% figure can be intimidating. Especially in our local DC Metro market where home prices are among the highest in the country. Good news: Despite what you may think, or what your parents or grandparents may have told you, you do not need a 20% down payment to purchase a home. There are plenty of mortgage financing options – good, prudent ones – that allow homebuyers to put down less than 20%. A study done in 2017 by National Association of Realtors found that the median down payment for first time homebuyers over the three previous years was 6%. That is very different from the 23% back in 1989.
So, if you’re stably employed and know you can qualify for (and comfortably handle) a monthly mortgage payment, and tired of paying your landlord’s mortgage, and all that’s holding you back from buying is the overwhelming feeling that it will take FOREVER to save up a 20% down payment for that one bedroom condo in the city or that three-story townhome near a Metro – you’re in luck! And you have options!
FHA Financing. Traditionally an FHA loan was the primary option available to buyers with less than 20% down payment. These are government loans insured by the Federal Housing Administration, a division of HUD. FHA loans allow as little as 3.5% down payment. They do require monthly mortgage insurance as well as an up-front mortgage insurance premium that is typically financed into the loan. FHA guidelines are less restrictive compared to Conventional guidelines and can be the best option for a borrower with less-than-excellent credit scores.
Conventional Financing. A Conventional or “Conforming” loan is a mortgage loan that adheres to the guidelines of Fannie Mae or Freddie Mac. These are loans that traditionally required a 20% down payment. However, for years now Conforming loan programs have allowed 15% down, 10% or even 5% down payment. The current Conforming Loan Limit is $453,100. However, certain high-cost areas in the U.S. (including DC Metro) allow for expanded “High Balance” loans as high as $679,650. This means in a high cost area you can purchase a $700,000 home with 5% down payment!
When a buyer pays less than 20% down some form for PMI (Private Mortgage Insurance) is required. There are a couple options for how PMI can be paid: 1) Monthly 2) As a one-time fee at the time of purchase or 3) Priced into the interest rate. PMI rates are “risk based” and therefore dependent on a borrower’s credit score. For a well-qualified borrower with excellent credit, the PMI may be less expensive than you think.
HomeReady and HomePossible – In 2016 Fannie Mae and Freddie Mac both introduced loan programs to offer low down payment options to buyers at favorable interest rates and better PMI rates than previously available with a Conforming loan. HomeReady (Fannie Mae) and HomePossible (Freddie Mac) allow as little as 3% down payment. You do not have to put down only 3%. You can use these programs with 5% or 10% down (or more) and take advantage of the preferable interest rate pricing and PMI rates. These are still fully documented loans and a borrower must qualify with acceptable debt-to-income ratios, but this can be an excellent option for a qualified first-time homebuyer, and will often compare favorably to an FHA loan.
VA Home Loan. For qualified military borrowers the Department of Veterans Affairs insures mortgage loans with as little as 0% down payment. A borrower must be a qualified active or retired member of the armed forces with a valid Certificate of Eligibility (COE) for a VA Home Loan.
If you think you can qualify for a mortgage payment – or want to take the steps to find out – and think one of these lower down payment options might be a good fit for you, reach out to a local lender to gather more information and see what financing options are best suited to your specific circumstance.
Brian Murphy, NMLS #704749, MVB Mortgage