Friday, September 23, 2011

Debunking the 20% Downpayment Myth

Ok...I'm going to get it out of the way right now...You DON'T have to put 20% down when you buy your new home.  If you've been thinking about it and busting your hump to save up that $40,000 downpayment for that $200,000 home, I applaud you, but life can be a little easier.

To be clear,  putting more money down will usually get you a better interest rate, help you avoid Private Mortgage Insurance (PMI, explained later), and reduce your monthly payments.  But, if 20% down seems like a massive number that you might never reach, I've got options for you.  I won't go totally in depth because your lender will be much more knowlegable and will be able to give you current requirements for each loan scenario.

  • USDA Loans -  USDA (United States Department of Agriculture) loans are backed by the government and require 0% down and can in some cases offer closing cost assistance as well.  These loans are typically available in rural and agricultural areas and give you a great option to purchase that "nice ol' home in the country".  Elgibility areas can sometimes creep very close to urban areas, which means you don't have to be too far out of town to be elgible.  Parts of Fort Collins, Wellington, Windsor, Severence, Johnstown, Berthoud, Longmont, Loveland, and Greeley have USDA elgibility.  Go to to search areas of elgibility and talk to your lender early on if you want to pursue that loan program.
  • VA Loans -  VA (Veterans Administration) loans are also loans backed by the government and are designed to help those who have served in the armed forces with some of the best loans available.  VA loans require 0% down, with no private mortgage insurance. 
  • FHA Loans - FHA (Federal Housing Administration) loans require a minimum of 3.5% down.  They are privately funded loans, insured by the federal government.  There are credit score minimums and income requirements.  PMI is typically required on these loans as well, but closing cost assistance is also available.
  • Conventional Loans - Depending on your lender, loan programs with smaller down payments, typically 5%-10% are available with very reasonable interest rates.  Every lender has different requirements, consisting of debt to income limitations, credit score minimums, along with other financial requirements, all of which can affect your "credit-worthiness".  Speak with your lender to see what is available for your unique financial situation.
Let's take a quick minute to talk about Private Mortgage Insurance.  PMI is an additional fee charged to the borrower (i.e. you the buyer) to help protect the lender in case you default on the mortgage.  Typically until you have a 20% equity position in your home, your lender is taking a big risk lending to you, and you need to pay for it.  The fee for PMI is either a percentage of your loan amount, or closer to $55 per $100,000 financed.  So on a $200,000 mortgage, you would pay about $110 per month just to help protect your lender from your default. 

There are low downpayment options that will help you avoid PMI.  Combination loans called "piggy-back" loans give you a second mortgage to pay down in combination with your first mortgage.  You'll see piggy back loans in the following form 80/10/10 where you'll put down 10% and carry a second mortgage at 10% of the loan amount, or 80/15/5 where you'll put down 5% and carry a second mortgage at 15% of the loan amount.  Although you monthly payment will be similar to a monthly payment with PMI, your benefit is that instead of the PMI getting "thrown away", the extra money you're paying on your piggy back will be put into the equity of your house.  Having a good income history and great credit could be necessary for these loans.

So, that's a quick look at low down payment options, PMI and piggy back loans.  Contact me and I can put you in contact with great lenders who can maximize your options, I'm never too busy for you.

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