The Big Down Payment Myth

The Big Down Payment Myth

 

Having the spare capital to put 20 percent down on a home purchase is great, but it’s certainly not the norm. Still, many people think it is and that belief may be holding some would-be home buyers back, particularly young adults.

Indeed, 39 percent of non-owners say they believe they need more than 20 percent for a down payment on a home purchase. Twenty-six percent believe they need to put down 15 to 20 percent, and 22 percent say they need a down payment of 10 percent to 14 percent to buy, according to the National Association of REALTORS®’ 2017 Aspiring Home Buyers Profile report.

But now for the reality: The average down payment on a purchase mortgage was just 11 percent in 2016. And that’s just the average; often times down payments are much lower. For borrowers under the age of 35, the average down payment was just under 8 percent, according to NAR’s survey.

As such, “aspiring first-time buyers think it takes twice as much to buy a home than it really does,” writes Jonathan Smoke, realtor.com®’s chief economist, in his latest column.

How much a person truly needs for a down payment depends on their situation. Their financial circumstances, home location, and the price of the home are important factors.

But there are many mortgage options that offer the opportunity to make low or even no down payments. For example, the Department of Veterans Affairs and the U.S. Department of Agriculture offer no-money down loans to those who are eligible. In 2016, 16 percent of buyers under the age of 35 put no money down on their home purchase.

Further, the largest share of loans for buyers under age 35 last year were for people putting down less than 5 percent on a home purchase (or about $3,500). The 3 percent down payment programs backed by Fannie Mae and Freddie Mac, and the 3.5 percent FHA mortgage that primarily targets first-time buyers, are both helpful programs to consider. These loan programs don’t require unblemished credit either. The average FICO score was 713, but realtor.com® notes borrowers with a 639 were still getting approved.

As such, Smoke says the millennial dreaming about homeownership needs to get this message: They need a FICO score of at least 639 and enough for a 5 percent down payment (that is, if they don’t qualify for the other programs with lower payment options). In that case, they’ll need to save about $3,500 to buy in the typical American town.

 

I read this article at: http://realtormag.realtor.org/daily-news/2017/02/15/big-down-payment-myth?om_rid=AACmlZ&om_mid=_BYpJckB9YecvKz&om_ntype=RMODaily

 

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Low Down Payment Loans Are Back

One of the biggest hurdle I see – is saving up for the 20% down payment for a home loan.  And with the cost of housing in the Bay Area – that 20% is a very pretty penny.  In fact, it seems almost impossible for some to even fathom how to save that much.  So the prospect of a low down payment could help get buyers into the market. Enjoy this article… 

Low Down Payment Loans Are Back

A feature of the housing crisis is back.

Just because you haven’t saved up enough for a 20% down payment—or even 10%—doesn’t mean you’re locked out of the housing market.

In 2015, 26% of loans for home purchases were made with down payments of less than 10% of the home’s value, according to data released Thursday from RealtyTrac. That’s a 10% increase from 2014. In fact, the number of home owners who purchased homes with low down payments has been steadily increasing for the past five years.

The uptick is due in large part to a reduction in the cost of mortgages offered by the Federal Housing Administration, which underwrites loans to borrowers with subpar credit. While critics worry that a surge in low-money-down lending could set the stage for a reprise of the housing bubble, market watchers say the most important result of the change is to make homeownership a more realistic goal for many people, especially first-time buyers. In recent years, there has also not been a significant difference in the number of people who default on low-down-payment loans as opposed to those with higher down payments, according to data from the Urban Institute.

“Low-down-payment lending isn’t synonymous with risky lending,” says Nikitra Bailey, executive vice president of external affairs at the Center for Responsible Lending.

Read Next: What Mortgage Is Right for Me?

Indeed, the FHA has always offered loans with down payments as low as 3.5% to qualified buyers.

Still, there are considerations if you’re thinking about going that route. For one, it means you’ll have less equity in the home. You’ll also need to pay for private mortgage insurance, required for loans with down payments of less than 20% to guard against the risk of default.

If you’re looking to become a homeowner but can only afford to put a small amount down, here are a few more things to keep in mind:

  • Talk to a certified credit counselor, Bailey says. An adviser can walk you through your finances and help you decide if you’re in a position to buy a home despite not having a lot of savings built up. The U.S. Department of Housing and Urban Development also sponsors housing counseling agencies nationwide; you can find a list state-by-state directory here.
  • Keep in mind the cost of private mortgage insurance, which is required for anyone buying a home with a down payment of less than 20% of the value of the home. Add that on top of monthly mortgage premiums (and the higher interest rates you’ll likely pay when you put down less money), and in the long run taking out an FHA loan with a low down payment could be more expensive than paying 20% upfront. Additionally, the agency now also requires that certain borrowers pay insurance for the entire term of the mortgage, unless they refinance.

Make sure you’re able to set aside at least 1% of the house’s value in cash, in case you need to tap into it for maintenance or emergency repairs, says Mark Calabria, director of financial regulation studies at the Cato Institute. And of course, be prepared for unforeseen financial challenges in your own life: For instance, if you were to lose your job, you’d ideally want to have enough savings to cover six months of mortgage payments.

I read this article at: http://time.com/money/4218298/buy-home-low-down-payment/

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Got Questions? – The Caton Team is here to help.  

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