Did you know that you can actually own a home with a 5% down payment?
First, let us define down payment and its role in owning a home. According to Redfin:
A down payment is the amount of money a buyer pays at closing to fund a home purchase, usually expressed as a percentage of the total home price.
The required down payment amount varies depending on the type of loan, ranging from 0% for a VA loan to more than 20% for some conventional loans.
It was a common belief that a 20% down payment is required to own a home. Some of the benefits of a hefty down payment are:
- Easy to manage monthly payments
- Smaller amount to borrow
- Smaller interest rates
- More equity in your home
However, you can still own a home even if you put down a low (to zero) downpayment. How?
Below are the loan types that allow low down payment. In the case of VA loans, zero down payment! Find out which loan type will work best for you.
There are two loan types:
- Government Insured Mortgages
- Conventional Mortgages
The Government-Insured Mortgages are loans backed by government agencies to help Americans become homeowners. These agencies are:
- U.S. Department of Veterans Affairs (VA loans)
- U.S. Department of Agriculture (USDA)
- Federal Housing Administration (FHA)
0% Down Payment
VA loan offers up to 100% financing on the value of a home.
The VA sets the qualifying standards and the terms of mortgages. This may be availed via private lenders such as banks or mortgage companies.
Who is it for?
Eligible service members, veterans, and their surviving spouses.
Low to 0% Down Payment
The USDA loan is offered to moderate to low-income borrowers who wish to purchase a home in a USDA-eligible area. It offers low mortgage interest rates and with little or NO money down to those who meet specific income limits.
Who is it for?
For borrowers with FICO score of 640 or higher, looking to buy a property in rural areas.
Applicants whose credit score is below 640 must meet more stringent requirements while those without, or limited credit score, must provide non-traditional credit references.
As low as 3.5%
FHA offers lower down payment requirements (as low as 3.5%).
This type of loan (with below 10% down payment) will require an upfront mortgage premium insurance payment, on top of the monthlypremium paid throughout the life of the loan.
Who is it for?
Anyone with a minimum FICO score of 580 can get a maximum of 3.5 percent financing.
Anyone who has a lower credit score can still file for FHA loan but must be willing to pay at least 10% down payment.
This loan is excellent for first-time home buyers with less immaculate credit score.
Conventional Mortgages – as low as 3.5% to 5%
A conventional mortgage is a home loan that’s not insured by the federal government. It has two types: 1. the conforming and 2. the non-conforming loans.
A conforming loan meets the loan amount within the limit of government-sponsored enterprises (GSE) such as Fannie Mae or Freddie Mac.
On the other hand, loans that do not meet these criteria are non-conforming and therefore cannot be bought by GSEs.
Who is it for?
Anyone with a FICO score of 620 (or higher) and a debt-to-income ratio of 45 to 50 percent. Excellent for buyers of a single-family home.
Private Mortgage Insurance
According to Investopedia, If you purchase a home and put less than 20% down, your lender will minimize its risk by requiring you to buy insurance from a Private Mortgage Insurance (PMI) company prior to signing off on the loan.
The cost you pay for PMI varies depending on the size of the down payment and loan, but typically runs about 0.5 to 1% of the loan.
It may be possible to avoid PMI, by taking out one main mortgage plus a smaller loan to cover the costs of a 20% downpayment, or reconsidering the purchase of a home without sufficient savings to cover the down payment.
Last year, I helped 2 buyers purchase their respective homes with 5% down on a conventional mortgage.
Case studies:
Client 1:
- Price: $635,000
- Location: Oakland, CA
- Townhome: 2bed|2.5bath|2car
- Down payment: $31,750 (5%)
- Closing Cost: $3,457 (title and escrow)
- Monthly mortgage (without PMI): $3,221
- PMI: $285
Client 2:
- Price: 643,500
- Location: Richmond, CA
- Single Family Home: 3bed|2bath|1car
- Down payment: $32,175 (5%)
- Closing cost: $4,424 (title and escrow)
- Monthly Mortgage (without PMI): $3,139
- PMI: $127
IN A NUTSHELL
If you are looking to buy a home, there is a multitude of financing options available for you. If you’re worried about the 20% down payment, it’s comforting to know that it’s possible for you to own a home with just 5% down payment or less.
Do you have questions about mortgages and down payments? Send me a message for a free consultation so we can discuss your options.
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