07 Dec Down Payment Alternatives
The popular idea that you need 20% of your loan for a down payment is a great rule of thumb but not always possible. Particularly for first-time homebuyers and those with student loans, it is not realistic to assume that a large sum of money is readily available for this purpose. Along with closing costs, the down payment can be overwhelming, and it’s important to keep other accounts such as retirement funds and emergency savings intact. The great news is that it’s not a requirement to put 20% down when buying a new home, and there are many alternatives if you are ready to make the leap before you have built up that amount in savings. Following are some of those alternatives.
Insured by the Federal Housing Administration, FHA loans are a great option for borrowers with credit scores of 580 and above. With a requirement of only 3.5% for the down payment, these loans are a fantastic alternative for prospective homeowners who are ready to buy sooner rather than later. While the Federal Housing Administration does not issue the loan, the FHA insures the loan for the lender. The FHA is part of the government’s Housing and Urban Development agency. HUD proudly declares its mission to create “quality affordable homes for all,” and the FHA mortgage program is part of its fulfillment. This program is available in all 50 states as well as the District of Columbia. Along with their low down payment requirement, FHA loans have more flexible underwriting standards than many other loan types, which removes extra hassle and issues for borrowers.
For qualified military veterans, a program administered by the United States Department of Veterans Affairs called a VA loan is a zero down payment alternative, offering 100% financing. VA loans are federally insured but offered by lenders to borrowers who have a “Certificate of Eligibility.” While there are credit and income requirements, VA loans have underwriting standards specifically tailored for military families’ situations. There is no private mortgage insurance throughout the life of these loans, even if you choose to put no money down at closing.
Private Mortgage Insurance
For most conventional mortgage loan programs, the 20% down payment is not a requirement, and private mortgage insurance (PMI) is the offered alternative. A PMI policy is a temporary addition to your monthly mortgage payment, used to counteract the “risk” for the lender associated with a lower down payment. Once the balance of your mortgage is below 80% of the home’s value, you can ask to have this extra payment removed from your monthly fees.
At Fairway Independent Mortgage Corporation Montana, our loan officers would love to discuss these and many other down payment alternatives with you. When provided details of your financial situation, our knowledgeable team can customize a loan based on your needs. Give us a call or drop by one of our office locations today to get started!