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How Much of a Down Payment Do Home Buyers Really Need?

How Much of a Down Payment Do Home Buyers Really Need?. 0

Renters are feeling pressured by rising rental costs, and the financial strain is making it increasingly difficult for them to make the transition to home ownership.

In Zillow’s recent Housing Aspirations Report, renters in 20 U.S. major metropolitan areas were surveyed about their barriers to home ownership. 70% of respondents said that saving for a down payment was their biggest challenge. About 50% of respondents said that outstanding debt held them back.

The lack of a down payment is reoccurring problem cited among potential home buyers. While having 20% down to avoid mortgage insurance costs is a good idea, it is not absolutely required!

In fact, a Conventional mortgage backed by Fannie Mae or Freddie Mac allows down payments as low as 3%. Private mortgage insurance premiums will be required, but these can be waived once you achieve 20% free and clear home equity. This can be accomplished by paying down your principal balance over time, or through home value appreciation, or both!

Veterans and military service members have excellent mortgage benefits available to them through the Veteran’s Administration. A VA mortgage does not require any down payment at all, as long as the home sale price does not exceed the appraised value. There is no mortgage insurance requirement, and the program allows closing costs to be paid by the home seller!

FHA mortgages, backed by the Federal Housing Administration, allow down payments as low as 3.5%. The down payment can even be supplied by a third party in the form of a cash gift, though documentation requirements are stringent.

Mortgage insurance is required on FHA loans when the down payment totals less than 20%. However, if at least 10% down payment is made, the mortgage insurance premiums may be waived after 11 years. Otherwise, the premiums must remain for the life of the loan.

Of course, the larger your down payment, the more equity you have in your home right from the start. But as home prices rise and interest rates increase, renters should weigh their home buying power today, vs. having a larger down payment in the future, when home buying costs could be higher as well.

Your Exclusive Buyer Agent will provide you with referrals to local, trustworthy lenders who will explain your mortgage options and help you choose the right loan for your home purchase! Find an EBA in your area today!