|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
Mortgage Myth: You Need a 20% Down Payment
Since the mortgage meltdown of 2008, the popular wisdom has been that banks won’t give you a mortgage without a 20% down payment. To a great extent, that perception has become reality, with nearly 40% of non-homeowners believing they need to put at least 20% down to buy a home. Another 26% believe they need to put down between 15 and 20%. However, according to the National Association of Realtors, the reality is that hardly anyone put’s 20% down on a house these days. In fact, the average down payment in 2016 amounted to just 11%. Borrowers under age 35 averaged just an 8% down payment. In 2016, 16% of buyers under age 35 put zero down on their home purchase.
Is a Low Down Payment Right for You?
Whether you should make a 20% down payment or pay as little down as possible is a completely different issue. The size of your down payment should be based on your particular situation, including your financial circumstances, your housing budget, the home’s value and the local housing market. All of these factors should be carefully considered before making such a big financial commitment.
Start with Your Bank
If you have excellent credit, a low debt-to-equity ratio and steady employment, many lenders will work with a lower down payment. But, if your credit is less than perfect and you can’t meet the requirements of a conventional loan, there are still several options that offer the opportunity to make a low or even zero down payment.
USDA Home Loan
If you plan on buying in or around a rural area, you could qualify for a USDA home loan which offers zero down loan options. There are income limitations (you can’t earn too much money) and the credit requirements are lenient.
VA Home Loan
Veterans with at least two years of service or active duty service members with 90 days of service can qualify for 100% financing. VA loans offer competitive rates and low closing costs. A credit score between 620 and 640 will qualify for a VA loan with most lenders.
FHA Home Loan
If you can qualify for an FHA loan backed by the Federal Housing Administration your down payment can be as low as 3.5%. Less than perfect credit is welcomed along with a steady income.
Freddie Mae and Freddie Mac
These government-sponsored agencies target low- to middle-income first-time buyers with a 3% down payment program. Borrowers with FICO scores as low as 630 are getting approved.
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