This article talks about the different down payment options. The down payment, which has become required in today’s market, as virtually all no-down-payment programs through conventional lending practices have been eliminated in the wake of the bursting of the housing bubble in 2008.
What is a Down Payment?
A down payment is a lump sum of cash that is paid upfront for a major purchase, like a car or a house. This cash is applied against the purchase price, essentially paying “down” the amount of money to be borrowed for the purchase. The larger the down payment, the more house a buyer may be able to purchase. This is basically a sign to a lender and seller that your are a “good faith” borrower with the means to make the payments.
How Much of a Down Payment Do I Need?
This is a very good question, and there are several answers.
The most common answer is 20 percent of the purchase price. Many lenders will give mortgages with less money down, but they will impose private mortgage insurance, or PMI, on the loan. PMI is an insurance policy for the lender that protects it in case the borrower defaults. You will only have to pay pmi for only several years if you are good with your mortgage payments as the pmi is only added to mortgage payment to hedge risks associated with non-payments.
What If I Can’t Get 20 Percent Down?
However, if you don’t have 20 percent or cannot get it soon enough, there are some programs that will allow buyers to have lower down payments.
The Federal Housing Administration (FHA) has FHA loan programs that only requires a 3.5-percent down payment. FHA loan qualifications are also fairly low. The Veteran’s Administration (VA) also has another low (and no) down payment program. However, it is only available for veterans, active duty and guard/reservists and certain family of veterans. These programs allow for no down payment requirement, and no need to buy PMI. The VA would cover any losses to the institution (up to a limit) if the borrower defaults. Also, the programs may limit the amount of closing costs a buyer pays to a certain percentage of the purchase price. You must check with your lender for eligibility requirements of each of these programs.
Another option might be your retirement account. Some 401(k) and 403(b) employer-sponsored retirement programs have a provision that allows members to take out money tax-free for a down payment on a house. There are rules, of course, and you should check your plan documents or talk to your plan administrator for details about this.
Yet another option is what is called a “piggyback loan,” which are usually meant for borrowers with less than 20 percent down. These types of loans are mortgages that are split between two or more lenders. For example, a buyer with a 10-percent down payment might get an 80-10-10 loan, where 80 percent of the mortgage is loaned by Bank of America, and 10 percent by JPMorgan Chase (the other 10 represents the down payment). With piggyback loans, each lender assumes less than full risk, which means they may be more willing to loan money with a smaller down payment or a lower credit score. You must talk to your loan officer about your situation and whether a piggyback might be an option – because it isn’t for everyone.
So you’ve decided to buy, you’ve checked your Toolbox, went over your credit report, you know how much house you can afford and you have been pre-approved for a mortgage. Now you have information about down payments and down-payment programs that can get you that one step closer to your house. Next, we’ll help you find the right real-estate professional to hire to help you find that right house that fits your lifestyle and budget.