If I could liken the homebuying process to an American Ninja Warrior obstacle course, many people would probably see the down payment as the warped wall. There’s an old myth that you have to have 20% of the purchase price as the down payment, but that’s no longer true. No warped wall or salmon ladder here – much more like the obstacle courses your P.E. teacher set up in elementary school.
What’s the point of a down payment?
The down payment diminishes the amount of risk your lender takes on with your home loan. The less of their money invested in the house means less they end up losing if it’s foreclosed. They assess this risk with what’s called the loan-to-value ratio, or LTV. The LTV is determined by dividing the loan amount by the appraised property value. Traditionally, lenders aim for 80% LTV, which is where the benchmark of a 20% down payment comes from. Additionally, it determines the amount borrowed on the loan.
So why does the standard of 20% down still exist, then, if there’s lower down payment options out there? Well, there are some benefits to putting that much down, like not having to pay for mortgage insurance, a lower monthly payment and the possibility of a lower interest rate. Most of these low down payment programs will require mortgage insurance for the life of the loan or at least until you pay it down to 80% of the LTV ratio. The cost of mortgage insurance will make your monthly payment go up.
Low Down Payment Options
There are actually many loan options that require only 3.5% down and lower. FHA, VA, USDA and more all have programs to help those who have difficulty saving up for their down payment. Here’s a reader’s digest of some of the most common low down payment programs.
FHA
This program is only 3.5% down, but they do require you to pay mortgage insurance for the life of the loan.
VA & USDA
For both of these loan programs, the LTV can be as high as 100% (i.e. no down payment) with no mortgage insurance, but they do have additional fees along with them.
HomeReady and Home Possible
HomeReady and Home Possible were created by Fannie Mae and Freddie Mac, respectively. These programs have 3% down payment options, with mortgage insurance required until the LTV is lowered to 80%.
Ultimately, it’s up to you and your mortgage banker to decide which option is best for your financial needs. Reach out to your local Flat Branch family to learn more!
