The Down Payment Myth

Dated: September 22 2020

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Down payments are traditionally the most expensive elements of a new home purchase.  But it is a myth that you need a 20% down payment to buy a home.  The “20% Down Payment Myth” is widely circulated and passed down from parents to children and from college professors to students. 

Today, there are still no-down-payment home loans available and you do not need to be a first-time home buyer to qualify for one.  These loans are available to individuals who can document the adequate income that is needed to repay the loans and must also exhibit minimum credit scores between 620-640 depending upon program.  Examples are the Home Plus Mortgage Program and Home in Five Mortgage Program. If you are interested in more information on these programs, please contact us to discuss the specific eligibility requirements.  

Thankfully, there are also several other programs that some aspiring homeowners may qualify for that offer less than 20% down, even less than 5% down! Three government-backed mortgage programs that allow for down payments of less than 5 percent are the FHA Mortgage:  3.5% down payment; VA Loans:  100% financing and Conventional 97 Loans:  3% down payment. 

The FHA Mortgage:  3.5% Down Payment

The Federal Housing Administration (FHA) is part of the government’s Housing and Urban Development (HUD) agency.

HUD’s mission is to “create strong, sustainable, inclusive communities and quality affordable homes for all”; a role it’s been fulfilling for decades. Via the FHA, HUD makes low-down payment mortgages available to U.S. buyers in all 50 states, and the District of Columbia.

The FHA doesn’t make mortgages. Rather, it insures them.

The agency publishes a series of standards which all of its insured loans must meet, and lenders underwrite FHA-backed mortgages to these guidelines. Loans which meet the FHA’s criteria are eligible for insurance, and can be approved.

FHA mortgage insurance premiums (MIP) are paid by the borrower in two phases. The first phase is paid at closing and is known as the FHA upfront mortgage insurance premium. The second phase is paid monthly, along with the monthly mortgage payment.

FHA loans do more than just offer low down payments — they also provide for flexible underwriting standards so that “second chance” buyers can get approved without hassle or issue. One such FHA program is the FHA Back to Work Loan, which lets a buyer apply for a loan just 12 months after a bankruptcy, short sale, or foreclosure.

VA Loans:  100% Financing

Via the Department of Veterans Affairs, veterans of the U.S. Armed Services can access loan programs not available to the typical U.S. consumer. One such program is the no-money-down VA loan.

VA Loans offer 100% financing and underwriting standards are sensitive to the needs of a military family. For example, military families relocate frequently; receive housing allowances; earn hazard pay; and, sometimes, are paid non-traditionally.

With conventional financing, military families are sometimes challenged to “prove income." Via the VA loan, standards are loose and approvals are simple. Plus, because VA loans are guaranteed against loss by the government, VA mortgage rates are typically lower than for a comparable conventional mortgage.

Furthermore, the VA loan requires no mortgage insurance ever, regardless of your down payment. Whether you finance 100% of your home or make a fifty-percent down payment, the VA will never charge to insure your loan.

Note, though, that the VA charges a funding fee with each VA loan which, for some veterans, can be waived.

Conventional 97:  3% Down Payment

Fannie Mae and Freddie Mac reinstated the popular Conventional 97 program in late-2014. The program is available to first-time buyers and repeat buyers; and can even be used to refinance.

It’s often the best choice for home buyers with at least above-average credit scores; and who can verify income and employment. The 3-percent down payment program also allows for a gift of down payment.

The Conventional 97 program is limited to loans sizes of $484,350 or less, which means that jumbo-conforming loans between $484,350 and$726,525 are not allowed — even in high-cost areas such as Orange County, California and Seattle, Washington; and the program is available for single-family homes only.

The Conventional 97 program is available from most mortgage lenders.

For more information on any of the loan programs you have seen here, please feel free to give us a call to discuss them at 480.258.9907-- or simply hit the finance tab at the top of the page and type in your question.

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John Lick

John Lick--brings his vast experience in contracts and negotiations to the Maurice & Lick team. Prior to becoming a full-time Realtor, he worked for a multi-billion dollar government agency and with ....

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