Edwin St. Aubin's Blog
It’s common knowledge that a 20% down payment is key when you buy a home, but is it absolutely necessary? With average home prices continuing to rise, it’s hard to actually save up that sizable of an amount of money. Thinking bout the numbers, buying a home may seem impossible.
There’s good news: The 20% down requirement is actually a myth. If you put less than 20% down, you can still get a mortgage with most banks. There’s a reason why you hear that you need to put 20% down to buy a home. If you don’t put 20% down, you need to get either private mortgage insurance (PMI) or government insurance from the Federal Housing Administration (FHA). These types of mortgage insurance protect the lender if you don’t make your payments and the home is foreclosed on.
Do PMI Payments Go On Forever?
When your loan-to-value ratio reaches 80 percent, you’re able to ask your lender to cancel the insurance. Once the loan-to-value ratio reaches 78 percent, the lender has a requirement to cancel the PMI. This type of insurance can be costly, averaging at least a few hundred dollars a month.
Alternatives To 20 Percent Down
Look at financing before you find a house. There’s a few programs that can help you to buy a home without 20% down. There’s different ways to qualify for these programs, so your best bet is to talk to a lender well before you start your home search.
Government programs through places like the US Department of Agriculture and the Federal Housing Administration help people to buy a home with very little down- anywhere from 0-3.5%. Some of these programs can prove to be costly on the backend, due to extra insurance requirements, but they do provide an alternative path to home ownership.
There’s also an option to actually finance the down payment with what's called a subordinate loan. his may make sense for some, however, you are taking out a loan in order to pay for another loan. The process may be counterintuitive for you and your financial situation.
Different Paths To Homeownership
While there’s many different paths to owning a home, there’s no one right answer. Since everyone chooses different properties and has different financial situations, there’s a way for you. Even if saving up a 20% down payment is seemingly impossible, there’s way to get around it. Start with talking to your bank and other lenders to see what types of programs are available to you and discover what your path to homeownership is.