Are you considering purchasing a home? The downpayment on a first home is usually the biggest obstacle for homebuyers due to the fact that it is difficult to come up with a large chunk of cash. Even if you are a star saver, coming up with that kind of money can be hard. So what are the best downpayment options for your situation?
In an ideal world, 20% down toward your new home is the best option. By providing 20% down you can avoid paying private mortgage insurance (PMI) which protects the lenders interest if you can’t pay or default. However, if you have 20% or more you can avoid PMI all together. By providing a significant downpayment, you will save on interest, lowering your monthly payment. Additionally, lenders offer better interest rates to borrowers with a low loan-to-value ratio, and providing a larger downpayment lowers the risk to the lender. If you can’t swing a large downpayment, there are other options for you.
Federal Housing Administration (FHA) loans are popular with borrowers who have less than stellar credit, and well-qualified borrowers looking to finance with a low downpayment. FHA loans require at least a downpayment of 3.5%. To qualify for maximum financing, you must have at least a 580-620 (lenders vary in their requirement). However if you have a lower credit score of 500 to 579, you can still qualify for a loan with 10% down. Plus with these types of loans you still have to pay for mortgage insurance and there is a borrowing limit, all dependent on each state and county. Do you qualify for an FHA loan?
State and Local Programs
There are a number of state and local programs that help moderate to low income families. If you fall into this category you may be able to secure a lower mortgage and interest rate. Many times borrowers don’t realize they qualify for assistance because they believe they make too much, however there is a range of incomes that qualify, especially in high cost cities. Check with the National Council of State Housing Agencies to see if you qualify for any programs.
What is Private Mortgage Insurance?
Private Mortgage Insurance is a required insurance that you must take out if you put less than 20% towards your downpayment. This type of insurance protects the lender from loan default and usually costs ½%–1% of the loan.
- The lender will typically choose the insurance carrier
- Unfortunately PMI does not increase your equity
- Can be rolled into monthly payments or paid at closing
There are several ways to pay for for PMI: rolled into your monthly payments, at closing or yearly. If you pay at closing, PMI usually runs around 2.2% of the homes value. Once you’ve built enough equity in your home you can stop paying PMI.
Where does one start?
Checking your credit scoreand contacting a lender will be a your first steps in securing a mortgage. LendingTree is a great place to start, allowing you to compare multiple loan offers, including FHA loans.