Looking to move your family into a new home? You’re in luck.
Lately, getting yourself into a home is the easiest it’s been in years. After the 2008 financial crisis, down payment requirements rose to address the housing market’s woes. But for the past few years, those down payments have been dropping dramatically.
In fact, Julián Castro, the United States Secretary of Housing and Urban Development, says that 2015 is the year to buy a house.
Unless you’re a pro when it comes to the real estate market, you probably have some questions about how the whole mortgage thing works. That’s what I’m here for!
So first, let’s go over what a normal mortgage down payment looks like.
Typical Mortgage Down Payment Requirements
Most conventional mortgages require 10 to 25 percent of the purchase price as a down payment. If you have a low credit score, you may end up paying as much as 35 percent down.
Until this year, along with paying the down payment itself, you were also required by the Federal Housing Authority (FHA) to pay annual insurance premiums at a rate of 1.35 percent if you paid lower than a 20 percent down payment. Now that number has dropped to only 0.85 percent.
If you don’t have the money upfront to pay the more traditional 20 percent rate, here are 5 ways for you to pay much less, helping you get into your new home at only a fraction of the average mortgage down payment cost.
1. FHA Mortgage
The FHA loan has been around since 1934 as a means of helping people with poor credit qualify for a mortgage with a low down payment requirement.
It works like this: the federal government insures a loan for an FHA-approved lender in order to reduce the risk they take in offering a mortgage to someone who is more likely to default on their mortgage payments.
The minimum mortgage down payment for an FHA loan? Just 3.5 percent. That means for a $100,000 home, you’d only pay $3,500 down.
Another great thing about FHA loans is that they are assumable. That’s just a fancy term that means someone can take over your loan if they want to buy your home.
2. Fannie and Freddie Mortgages
Fannie Mae and Freddie Mac are huge in the housing finance system. They guarantee more than half of the country’s mortgages.
Both government-backed companies announced at the end of 2014 their plans to reduce their minimum mortgage down payment from 5 percent to 3 percent. This is a part of their “Conventional 97” program, which was discontinued in 2013, but reinstated by the FHA in 2014.
3. USDA Mortgage
The United States Department of Agriculture’s Rural Development mortgage guarantee program is wildly popular. However, you can largely ignore the name – the loans from the USDA are available to borrowers in some urban areas as well, not only to people in the middle of nowhere!
To qualify for a loan from the USDA, you must have a decent income and a solid credit score, and you can’t already own a home, make too much money, or live within specified urban areas.
If you meet these criteria, you can qualify for a zero down payment requirement. That’s right, no down payment at all to get yourself and your family through the front door!
One of the key advantages is the comparably low 0.40 percent mortgage insurance fee, which can be assessed along with closing costs.
4. VA Loan
This is definitely one of the better deals in America – if you’re a veteran or a current member of the United States military, that is. This includes members of the Reserves, the National Guard, and spouses of service members killed in the line of duty.
The best thing about VA home loans? There’s zero down payment for those that qualify.
The downside to this zero down payment requirement is that the borrower has to pay something called a funding fee, which is required by law.
The VA loan funding fee is currently between 2.15 and 3.3 percent. According to the VA loan website, this fee is “intended to enable the veteran who obtains a VA home loan to contribute toward the cost of this benefit, and thereby reduce the cost to taxpayers.”
5. Navy Federal Credit Union Loan
These guys are the largest credit union in the nation, offering 100 percent financing to members of the military, civilian employees of the military, United States Department of Defense employees, and their family members. I repeat, zero down.
While they’re very similar to the VA in that they’re government-backed and have close ties to the US military, they differ in that they have a much cheaper funding fee of 1.75 percent.
Some of their mortgages even offer the option of having no private mortgage insurance, even though the down payment is less than 20 percent.
Why You Should Seek the Minimum Mortgage Down Payment
Now that you have a better understanding of your options for mortgage down payment requirements, let’s talk about why you should want to pay the minimum mortgage down payment.
- More money to pay closing costs. While the down payment on your mortgage might save you from having to pay for private mortgage insurance for years, those rates are seriously low these days. That money could be used instead towards paying higher closing costs, which means you’ll pay less in financing over the lifetime of your loan.
- More money to make changes to your new house. If you save money in the beginning, you have wider options when it comes to making any necessary repairs (if you purchased a minor fixer-upper) or improvements to the design and appearance of the house. These changes can raise the value of your home!
- Pay off or reduce debt. If you have existing credit card or student debt, you could do the math to figure out how much you could save in the long run by paying off debt rather than using that money for a larger down payment. If you aren’t sure which would be better, consulting with a financial advisor is always an available option.
I know that this mortgage stuff can seem confusing at times. But rest assured, there are industry professionals out there who are willing to help you understand it with ease… myself included!
If you have any more questions, feel free to call or text me at 254-258-0777!