Oh, the dreaded down payment. When looking into buying a house, many people are comfortable with the idea of mortgage payments—sometimes they’re even lower than what the homebuyer was paying in rent! Down payments, on the other hand, are sometimes feared. Saving money takes time and discipline and depending on the price of your prospective home, a 20 percent down payment can be a very high number. The average house in the United States costs $192,800 right now, making a 20 percent down payment $38,560. The question you may be asking is: do I have to put 20 percent down?
Do I Have to Put 20 Percent Down?
Putting 20 percent down is often needed for a 30-year fixed-rate mortgage, and if you can comfortably afford it, it’s a great option. But if you’re asking, do I have to put 20 percent down? The simple answer is no, you don’t. There are many other options available to you, so don’t dismiss the idea of home ownership just yet and certainly don’t drain your savings to make that 20 percent goal. You should always have some money saved up for a rainy day (and especially when you’re buying a new house). You never know what hidden expenses might pop up.
So what other loans are available to you? Let’s look at your options.
Issued by a mortgage lender but guaranteed by the government, an FHA loan only requires a 3.5 percent down payment. It’s a popular option, but it does require some extra fees and insurance (private mortgage insurance, also knows as PMI).
If you’re a veteran or were married to a veteran who has passed away, consider a VA loan. Guaranteed by the Veterans Administration, these loans don’t require any down payment or PMI.
You could also take out a second loan, known as a piggyback loan. Many of these loans cover 10 percent of the purchase price, which leaves just 10 percent for the buyer to pay. Another loan will be needed to cover the remaining 80 percent. They don’t require PMI.
100 Percent Financing
Of, if you have excellent credit, you might be able to get 100 percent financing, depending on the lender. Some banks, like the Navy Federal and NASA Federal Credit Union, offer it. Other banks will cover more than 80 percent if they hold a large amount of the buyer’s assets (which can be held as collateral against the loan).
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Including a large down payment gives the lender reassurance that their risk level is small and the likelihood of you defaulting on the loan is low. Thus, borrowers able to pay a higher down payment will receive the lowest mortgage interest rates. However, that doesn’t mean it’s impossible to buy a house if you can’t afford 20 percent down. You don’t have to wait years and years, saving and waiting, saving and waiting, if you’re willing to look at options with higher interest rates and more fees.
But remember that if you can’t afford it, it will be very helpful if you have some other benefits to your financial health (such as a high credit score and stable employment) to give your lender confidence in you.
Do I have to put 20 percent down? No.
Should I? Only if you can comfortably afford it.