Looking to get your foot in the door? If you’re tired of paying someone else’s mortgage, now may be the time to pursue the American dream of homeownership. In fact, you need not put down 20% either. Those days are long gone. While you can always elect to put down the full 20% or more, many alternatives are available. What you want to know if buying a house is in your financial future…
Needing 20% Down Is A Myth
It is known within every real estate community that 20% down is the benchmark down payment for looking strong on paper. While this remains by general consensus, as the standard for financial strength, it is by no means a requirement nor expected.
Remember your purchase offer amount drives negotiation. How strong you are on paper does help, but when you make an offer to buy a home, the seller of the property has no idea of your financial strength other than what your real estate agent tells them and what’s on your pre-approval letter. The price dictates whether you’re in the game or whether you’ll continue to be on the search.
Realistic Mortgage Lending Options That Create A “Sold” House
3.5% down
The minimum down payment you’ll need to get your foot in the door is a least 3.5% down. Most lenders can lend up to $417,000 with the exception of Alaska, Hawaii and Guam.
In some more affluent markets, the higher loan amounts (per county) allow someone with strong income and less cash to still get into the market.
5% down
Another popular choice amongst buyers is to consider using a conventional loan with 5% down. Same loan size amounts up to $417,000 with the exception of Alaska Hawaii and Guam going as high as 417,000 with as little as 5% down. An alternative to the higher-priced FHA Loan, the Conventional Loan allows for getting rid of the PMI after accumulating 20% equity after a minimum of 24 months whereas the FHA loan, any monthly mortgage insurance associated with the house payment is actually permanent (assuming 3.5% down).
0% down
Two options exist for this type of financing, one being a purchase money money financing through the US Department of Veterans Affairs. The program allows a veteran to purchase a house for literally no money down. Yep, the purchase price and loan amount are equal.
The caveat? Well there’s actually two, program is for military veterans only and the home must pass a clear pest report. This option could be optimal for brand-new construction or for property where any pest damage can be fixed by closing.
An alternative to this program is a loan guaranteed by the US Department of Agriculture, USDA. You need not be a veteran for this particular loan, however you can only purchase in an areas characterized less dense by the USDA.
In some areas, you may not be eligible to use the program due tighter qualifying income to payment ratios and location. The program works for homes designated rural by USDA only. Additional income limitations also apply. For example for nuclear family of four, a household income cannot exceed $96,400 per year.
All of these options allow for the use of gift funds. Family members, cousins, relatives are all excellent sources to tap for possible down payment or closing costs (usually about 2% of the home price). Even if you already own the home are looking to upgrade all of these programs could present a viable auction to bridging the gap between buying a home for the right price in the right area of vs. continuing to be on the search.
Loan To Values A Factor When Getting Pre-Approved
Mortgage Tip: The smaller the loan size you can qualify for the more challenging it will be to actually close escrow on your first home. Buying power is important especially in negotiating situations in competitive markets. Pure and simple, the bigger the loan size the more opportunity.
*Conventional Conforming -can go to 95% financing up to $417,000 and 90% financing up to the maximum conforming loan limit in the county in which the property is located. For example in Sonoma County, CA the maximum high balance loan limit is $520,950. A loan exceeding $417k to $520,950 would require a 10% down payment.
*VA -allow for 100% financing all the way through the maximum conforming loan limit in the county in which the property is located and can go bigger than the max conforming loan limit. Here’s how… the buyer would need to put in $25 for every dollar over the max county loan limit to their purchase price. For example with a $520,950 loan (max county loan limit mount) with a purchase price of $700k. Buyer puts in $44,726, 25% of the $179,050 -difference of $520,950 and $700k.
*USDA -allow for financing up to $417,000, but the kicker is this, in order to support a purchase price of $417,000, a buyer would need income to at $95,000 getting very close to the maximum income limitation at $96,400 just to be able to cut the mustard. More importantly, lending qualifying ratios are more stringent on this program than any other program with ratios being 29/31. Meaning proposed house payment before debts cannot be more than 29% of the gross monthly income and the house payment plus other debts cannot be bigger than 31% of the monthly pre-tax income.
*FHA loans-allow for up to 3% down payment up to the maximum conforming loan limit in the county in which the property is located
*Jumbos-usually can go as high as $750,000 with as little as 10% down
Remember when putting less than 20% down monthly property taxes and fire insurance turns will be required to be built into your monthly mortgage payment and there is a strong propensity of needing private mortgage insurance. Some lenders might offer an alternative option called lender paid mortgage insurance where the lender actually pays the monthly PMI despite not using 20% down to purchase a home, so make sure to do your homework.
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