March 5th, 2018 3:09 PM by Bob Rutledge
Pros and Cons of a Low Down
When it comes to a down
payment on your home, are you aiming high or low? The down payment is the
number one reason most buyers wait longer than they’d like to buy a home. In
fact, many sidelined buyers have the income and qualifications to make the monthly
mortgage payment, but lack the down payment.
But, there’s also a
misperception about 20 percent down. In a NerdWallet study,
44 percent of Americans believe you need 20 percent or more to buy a home. The
reality is that about 60 percent of homebuyers financed their purchase with a 6% or less down payment,
according to the National Association of REALTORS®.
But, how low is too low
for your down payment?
The fact is there are no
cookie cutter mortgages — your home financing will be as unique as you. FHA is
known for their low down payments for first-time homebuyers, but many
conventional fixed rate loans offer lower than FHA’s 3.5% down.
What about zero down? VA
loans for armed service members and qualified veterans provide a great value,
including no down payment, relaxed credit requirements and no mortgage
insurance. (Plus, down payment programs may help with closing costs and even an
In certain areas there is
the USDA Mortgage that also provides a zero down payment option, low interest rates,
relaxed credit guidelines, but with income restrictions depending on where and number
of people to live in the new home.
Some lenders offer grants
to buyers to overcome the down payment hurdle. But, according to guidelines
from Fannie Mae and Freddie Mac, lenders can make contributions to a borrower’s
down payment or closing costs only after the borrower has contributed a minimum
3% down payment.
“To meet that 3%
threshold, the borrower can still come with funds from a relative, a government
agency — such as grants from a housing finance agency — or from an employer
housing program. That has not changed,” says Lisa Tibbitts, a spokeswoman for
Let’s take a look at the pros and cons of a smaller down payment.
You can buy a home
sooner. With a lower down payment, you’re putting less down and not
saving as long before you get in a home. It can help you secure a loan at
today’s low rates and avoid any rent increases that may be on the horizon.
You’ll have more reserve
funds on hand. When you buy a home, there are many other related costs,
including home repairs and improvements. With a smaller down payment, you’ll
avoid being “house poor” as soon as you leave the closing table and can enjoy
using some of your hard earned dollars to make the home your own.
Down payment programs can
help. Don’t overlook down payment programs as part of your home
financing. These programs can help boost your down payment savings or even
provide a tax credit for the life of the loan. Some programs provide affordable
first mortgages with a very low down payment.
Your monthly payment will
be larger. When you put less down, your home loan — and monthly payment —
will be larger. Work with your lender to ensure you are comfortable with the
You may be required to
pay mortgage insurance premiums. Some down payment
programs may waive mortgage insurance (MI), but in most cases if your down
payment is below 20 percent, you’ll be required to get MI — it helps manage risk for your
lender and protect them if you fail to repay
the mortgage. It’s important to note that with a conventional, fixed rate loan
and borrower paid MI, you can cancel your mortgage insurance when you reach 20% equity in your home. With an FHA loan,
you must continue to pay MI for the life of the loan.
Could hurt in a
competitive market. Unfortunately, some sellers see smaller down payments as a
negative, although it’s not necessarily true. In fact, the seller may actually
earn less on the home from an all cash buyer with a lower offer. Plus,
some down payment programs will fund your closing costs — something you won’t
have to negotiate with the seller. Put the seller at ease by getting your
financing set up early and documenting it in a letter accompanying your offer.
The bottom line? The
right down payment for you depends on your situation. Weigh the overall pros
and cons of a low down payment and talk with your lender, Bob Rutledge, about what is the best
fit for you. Visit www.bobrutledge.com to learn about low down payment options, VA and USDA zero down payment programs, and down payment assistance.