Wednesday, September 30, 2020

Minimum Down Payment For First-Time Home Buyers

Someone once asked me: With the way the economy 
has taken a toll on savings accounts, the traditional 20% down payment seems out of reach for many first-time home buyers like myself. Are more first-timers going the route of 5%-15% down payments? Or should I wait until I've got the 20% saved?

I can answer your question in two ways because you're asking two separate questions.

I take "realistic" to mean whatever makes sense for a buyer. There are some who believe that 20% is a "realistic" minimum down payment because it avoids mortgage insurance. Lenders view borrowers who make a smaller down payment as presenting more risk. Because of this, lenders require mortgage insurance to manage their risk. That insurance costs the borrower money.

If a buyer has enough money for a 20% down payment and closing costs and has something left over for cash reserves, 20% is fine. I say that with one caveat: if you carry any consumer debt with rates higher than that of a mortgage, it is FAR better to pay those more expensive items off with available cash than to put it into a home down payment. 

There are many loan programs designed for lower 
down payments 3% on conventional or
3.5% for FHA, No down payment for VA and USDA
. Down Payment Assistance (DPA) is offered by FHA Government Grant program for 2% - 3.5% do
wn payment help, that is considered a gift and doesn't have to be paid back. 

If a buyer doesn't quite have enough cash for a 20% down payment plus closing costs, waiting to save up the money can be very expensive. First, home values are increasing in most areas of the country today. This means that if there is an appreciation rate of 4%, the $300,000 home you have your eye on today will cost $312,000 a year from today. There is also the matter of rising interest rates. 

If you have the ability to buy today regardless of the amount of cash you have—as little as 3% plus closing costs can get you into a home—buying now is a good idea. Yes, there will be mortgage insurance (MI), but that is temporary; once you can demonstrate to the lender that your loan balance is 80% of the home's market value or less, if you have an FHA loan you will need to refinance to remove your mortgage insurance.. but generally once you have 20% equity you can get your MI removed. 

I hope this is useful. Call me if you want to get pre-approved and see how much you qualify for, then you just need to find a home.  

Thank you for visiting my blog, please leave me a comment and let me if you like my blog and the information I post. 

Roxy Redenbaugh, Broker
Sr Mortgage Consultant
Residential and Commercial
The Greatest Compliment I Can Receive Is A Referral From Friends, Family, and Business Associates,
NMLS#269926 Company NMLS#1930219

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