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For some home buyers, the decision of how much money to use as a down payment can be very confusing and hard. The best route for each buyer or investor really does depend on their situation and personal preferences.
The information provided below is for the purpose of provoking thought and careful consideration about different financing programs available. It is not meant to steer you toward one particular program. It is merely an exposition of the options to consider when purchasing a home or investment property.
The “Down Payment Requirements” chapter reviews the minimum down payment needs for conforming loans, as well as some of the available alternatives with non-conventional (FHA loans) programs.
For example, you can purchase a single-family home or condominium with as little as 3.5% down payment. But there is a price for lower down payments on conforming loans: mortgage insurance (often called PMI, private mortgage insurance).
Mortgage insurance is required when the conforming loan amount is MORE than 80% of the purchase price (practical translation: down payment is less than 20%). Also, the lower the down payment, the higher the premium ratio charged.
Military veterans who qualify for a VA loan have the easiest route to buying a home with the need for no money down. VA loans can provide up to 100% financing for qualified military personnel and veterans. There are also non-conforming mortgage loan programs available that allow for 80/20 set-ups, which allow borrowers to obtain a second mortgage to cover the 20% down payment.
The bottom line is that regardless of your credit and income situation, you actually have different options to purchase a home with no money down.
The downside of a small down payment, whether you are using a conforming loan or a non-conforming program, is that you will need to pay higher interest rates and mortgage insurance.
Mortgage insurance is calculated against the loan amount, so you get hit with a double-whammy. Lower down payment means a higher loan amount and a higher mortgage insurance rate.
Mortgage insurance can be removed once sufficient equity is produced. So if the property shows at least 20% equity in a few years, the mortgage insurance can be refinanced away.
A related burden of lower down payments is obviously higher loan amounts, which translates into higher monthly payments.
During the first few years of the mortgage loan, the bulk of your monthly payments are for interest—which is normally tax-deductible. So you actually get a bit of your monthly payments back at the end of the year in the form of tax deductions.
Though the disadvantages of low down payments seem serious, there are also advantages. Take time to weigh the pros and cons and assess if this is the best option for you.
How much to put down should be carefully thought out. You must make your own personal calculation of the monthly payment that you can afford. Obviously, the lender will qualify you for a certain level, based on your income. But that qualification level is often different from the level that you feel comfortable with.
Your mortgage lender may have qualified your income for a monthly mortgage payment of $1,500; however, you may feel that you can realistically afford only $1,200 per month. If that is the case, you must lower the loan amount by increasing the down payment or finding a less expensive property.
Consult with your loan officer about the best situation for you, as well as ways to eliminate or minimize mortgage insurance.
Based in Bellevue, WA, Sammamish Mortgage has been in business since 1995, and we proudly serve customers in the Pacific Northwest region. Currently, we serve customers who are looking for homes in WA, ID, CA, CO and OR. If you’re currently in the market for a home in one of these states, or you’re thinking about buying a home, we’d love to hear from you. Our team of mortgage professionals has a detailed knowledge of the real estate markets of the Pacific Northwest and is able to help customers navigate these markets.
If you’re either looking or thinking about buying a home in WA, ID, CO, CA or OR, reach out to Sammamish Mortgage today. No matter what stage of the process you’re in, we can provide valuable information which can help you. Contact Us today to learn more, or View Rates to get a sense of what current mortgage rates look like. You can also get a Rate Quote personalized to your situation, or Apply Now to jump start the application procedure.
Whether you’re buying a home or ready to refinance, our professionals can help.
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No Obligation and transparency 24/7. Instantly compare live rates and costs from our network of lenders across the country. Real-time accurate rates and closing costs for a variety of loan programs custom to your specific situation.