How Do Different Home Loans Affect Your Down Payment?

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Written by Guest | October 1st, 2019
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Guest post by Holly Welles

A 20 percent down payment is no longer the norm. According to recent data, the standard down payment for 60 percent of first-time homebuyers is 6 percent or less. It's now far more affordable to purchase a home, as long as you have an understanding of the different loans and how they affect your down payment.

For example, you only need to put down 3.5 percent with an FHA Loan, but you also have to pay private mortgage insurance. These small details are critical to review, as they influence the amount of money you'll spend. You also need to consider the many advantages of a 20 percent down payment over your alternatives.

With a 20 percent down payment, you'll enjoy a variety of benefits. You won't need private mortgage insurance, you'll have a lower monthly payment, you'll likely enjoy a lower mortgage interest rate, and more lenders will compete for your business. At the same time, a 20 percent down payment isn't always feasible.

Many first-time homebuyers are young, with a lower annual income. They haven't advanced in their careers to the point where they're comfortable with such a substantial investment. Because of this, they seek out different home loans to help them achieve their goals and realize their dream of homeownership.

If you're in this situation, you can move forward with confidence knowing you have options. Here are three that you should know about.

1. FHA loans

The Federal Housing Administration provides financial assistance in the form of the FHA Loan. First-time homebuyers only need to secure a minimum of 3.5 percent for their down payment, rather than 20 percent. However, they'll incur the additional expense of private mortgage insurance.

This is essential to note, as borrowers with a better credit score may find a higher down payment with a conventional loan more affordable. Homeowners with private mortgage insurance have to pay a high premium which is non-negotiable. Of course, this makes perfect sense, given the context of the loan.

The less you put down, the greater the risk to the lender. Your private mortgage insurance will ensure your lender in the event you stop paying your mortgage. Furthermore, you won't receive any private services or special features when you purchase private mortgage insurance, which makes it even less appealing.

However, this insurance is often obligatory when you pursue a mortgage that exceeds 80 percent loan-to-value. With an FHA Loan, your loan-to-value for the period averages 96 percent, which helps to place the issue in perspective. In short, you may want to continue saving your money for a 20 percent down payment.

2. Conventional loans

The inclusion of "conventional" in "conventional loan" means it's not part of a government program, like the FHA Loan. This type of loan typically requires private mortgage insurance when you put down less than 20 percent. Most lenders provide conventional loans with PMI for down payments between 5 percent and 15 percent.

That said, some lenders may offer conventional loans with a down payment as low as 3 percent for qualified buyers. If you're not interested in seeking a loan from a government program, but you want to spend less on your down payment, you should set aside time for a thorough search. You may find what you're looking for.

More than that, some lenders offer grants for even less money down than 3 percent. Naturally, you'll pay your monthly premium for PMI, but the point remains the same. You have options as you browse for the right home loan, and it's inadvisable to settle for the first lender you speak with if you dislike their offer.

As a side note, you should also keep in mind that the pressures of private mortgage insurance may prevent you from funding and financing home upgrades. When a significant sum of money goes toward your mortgage and PMI premium, it's far more challenging to save for your intended improvements.

3. Special loan programs

Certain programs allow first-time homebuyers to avoid a down payment altogether. Veterans, service members, and rural borrowers can all take advantage of these zero-down-payment programs. If you fall into one of these categories — or other relevant populations — you should consider the programs below:

  • VA loan — Guaranteed by the U.S. Department of Veterans Affairs, a VA Loan is available to current or former members of the military. This includes some reservists, National Guardsmen, and surviving spouses as well. With an upfront funding fee of 2.15 percent, you can enjoy up to 100 percent financing.
  • USDA loan — Guaranteed by the U.S. Department of Agriculture, a USDA Loan is available to moderate- and low-income borrowers. You can build, improve, rehabilitate, or relocate a primary residence in specific rural and suburban areas. You can expect to pay an upfront fee of 1 percent of the loan amount, as well as a PMI premium of 0.35 percent of the loan balance per year in 12 equal installments. For these costs, you'll earn up to 100 percent financing.
  • Doctor loan program — Also known as a "Physician Loan Program," this loan is available to certain physicians, dentists, fellows, and residents who are just starting out and have considerable debt. The down payment for the Doctor Loan Program is usually between zero and 10 percent with no PMI necessary.

First-time homebuyers interested in the programs above need to meet their eligibility requirements and satisfy underwriting guidelines. You have an increased chance of approval for 100 percent financing when you have a strong credit score and history, so conduct your own research before contacting a lender.

Whether you pursue an FHA Loan, a conventional loan, or a special loan program, you can feel secure in your choice. You don't necessarily need a 20 percent down payment to enjoy the benefits of homeownership. With that in mind, research the available options and choose the right one for your unique circumstances.

Holly Welles is a real estate writer and the blogger behind The Estate Update. You can find more of her tips on homeownership, finance, and investing on Twitter.


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