Is it true that I need 20% down to buy a home?
Updated: Jun 3, 2019
Absolutely false! There are many programs that will help you buy a home with less than 20% down.
There are two ways to buy a home with less than 20% down:
You can get one loan with mortgage insurance (MI)
You can get a first loan up to 80% of the value + a second loan for the rest of the money you need
One Loan Options
Home Possible and HomeReady
These programs are for primary residence only and can be for first time homebuyers (FTHB), but that is not required. They offer lower rates and lower MI premiums than other options. A FTHB is defined as someone who has not owned a home in the last 3 years. FTHB’s need to get counseling to access the programs, but that takes only about one hour online.
If you can qualify for these programs, it will be your best option.
The loan amounts for Home Possible and Home Ready go up to the Fannie Mae Conforming limit. As of January 2019, that is $726,525. To find the limit for your area Click Here
If your income is 80% of the Area Median Income, HomeReady will give you a credit of $1,500 toward costs. Both programs allow a down payment of as little as 3%. To qualify, the property needs to qualify, or your income needs to be within the range acceptable to the program.
To check if you or the property qualify for Home Possible, Click Here
To check if you or the property qualify for HomeReady, Click Here
FHA loans go up to the limit for your county. In Los Angeles for example, the FHA limit is $726,525 as of January 2019. Advantages of FHA are:
They allow lower credit scores than most other loan programs
Their rates tend to be lower
They allow a higher DTI than conventional loans
They charge 1.75 points – this is funded into the loan, you don’t pay it through escrow, but eventually you will pay it when you sell or refinance the home.
They charge monthly MI and it never goes away. Conventional lenders allow you to remove the MI when the balance of the loan is 78% of the value when you got the loan; or they may remove it if the value increases and you have 20% or more equity.
Conventional Loan Programs
You can get a loan up to the conforming limit with as little as 5% down for a primary residence; 10% down for a second home; and 15% down for an investment property. If you don’t qualify for Home Possible or HomeReady, but do qualify for a conventional loan, these are usually a better choice than an FHA loan, especially if you have good credit.
You can pay the MI monthly; pay it all upfront; or you can opt for Lender Paid MI (LPMI). LPMI results in a higher rate, because the lender pays the premium. This is sometimes a good option. Ask your loan officer to show you all options before determining which is best for you.
You can avoid paying MI if your first loan is 80% of the value or less. MI protects the lender in case you default. It is not insurance for you, it is for the lender. In most cases, MI is not tax deductible.
These programs are often referred to as 80/15/5 or 80/10/10, etc. The first number is the percent of the first loan; the second is the percent of the second loan; the third is the percent down payment.
The second loan is usually a HELOC (Home Equity Line of Credit). HELOC rates adjust monthly and are tied to the Prime Rate. The Prime rate = the Fed Funds Rate + 3%. They allow you to pay interest only for the first 10 years, then the balance is repaid over the remaining 20-year term of the loan.
You avoid MI
You can pay down the second loan as quickly as you like, and you will be left with one loan for the remainder of the term
The interest on the second loan may be tax deductible (if total loans do not exceed the cap set by the IRS)
Your rate will go up every time the Fed hikes interest rates (conversely, it will go down if they lower the Fed Funds Rate)
If you are not prepared for the higher payment after the 10-year interest only period, it may make your home unaffordable.
I hope this has helped you understand your options if you want to buy a home, but do not have 20% to put down. If you have any questions, feel free to contact me at 877-728-2008 or Holly@HollyGustlin.com