Saving up 20 percent for a down payment may sound like it’s a rule of thumb, but the reality is that most homebuyers are putting down much less than that and are still able to finance their dream home.
In fact, the average down payment, according to the National Association of Realtors, has been 6 percent for the last three years.
How’s this possible?
There are actually several types of loans that allow homebuyers to qualify with a low down payment or no down payment at all.
How did 20% become the go-to down payment goal?
You’ll often read or hear experts encourage homebuyers to put down 20 percent because it’s the best way to avoid paying for mortgage insurance. Mortgage insurance can be between 0.5 and 1 percent of your total loan balance each month. It doesn’t sound like much, but it can add thousands of dollars to your loan costs over time, especially when you consider most homebuyers opt for a 30-year mortgage.
What do you do if you don’t have 20% lying around?
Here are several loan options for borrowers who don’t have a large down payment.
FHA loan. FHA loans typically require a 3.5 percent down payment, but that can go up to 10 percent if you have a poor FICO Score (500-579). You’ll have to pay upfront and annual mortgage insurance, regardless of how much you put down. The U.S. Department of Housing and Urban Development (HUD) has a searchable database where you can find FHA-approved lenders in your area.
SoFi. SoFi is new to the mortgage lending space, but it’s setting itself apart in a big way. It accepts borrowers with a 10 percent down payment, but they primarily target borrowers with higher FICO Scores — think 700+. On the bright side, they do not charge mortgage insurance. In fact, SoFi doesn’t charge any loan origination, application or broker commission fees.
VA loan. If you’re eligible for a VA loan, you’re in luck. VA loans don’t require any down payment from the borrower, they don’t charge mortgage insurance AND they have no minimum credit score requirement. But (there’s always a but!) VA loan holders will have to pay a funding fee, which can range from 1.25 to 2.4 percent of your loan amount.
HomeReady. Fannie Mae’s HomeReady mortgage program requires a minimum 3 percent down payment and comes with mortgage insurance. But you can get rid of the mortgage insurance obligation once your loan-to-value ratio falls below 78 percent. You don’t need stellar credit either — they accept borrowers with a FICO Score of 620 or greater. Because they’re backed by Fannie Mae, HomeReady loans also allow borrowers to use other sources of funding for their down payment, like a gift from family or friends.
USDA loan. If you’re set on living in a rural area, you may be eligible for a USDA mortgage loan. Generally, they classify any area with fewer than 10,000 to 20,000 residents as rural, but to be safe check out their property eligibility map. No down payment is required, and there’s no ongoing mortgage insurance fee, but you do have to pay a 2 percent upfront fee. Typical credit score requirements are 620 to 640 minimum. Borrowers also can’t have prior foreclosures, bankruptcies or major delinquencies in the past several years.
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