For many home buyers, mortgage options requiring significantly less than a 20 percent down payment are available. (New American Funding),
For many years, it has been widely believed that a 20% down payment is necessary to buy a home. However, this rule of thumb may not be applicable to everyone. Read on to discover the pros and cons of putting down 20%, tips for saving up for a down payment and options for mortgages with lower down payment requirements, which you can apply for by speaking with a Loan Officer from New American Funding.
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The 20 Percent Down Payment Myth
A down payment is often required for larger purchases, such as a house. While common convention previously dictated that prospective buyers must put down 20% on their new home, in today’s market, this isn’t always the case. Your minimum required down payment will depend largely on the requirements of your loan program.
Of course, providing a 20% down payment has its benefits. Putting down a larger down payment may help you qualify for lower rates and monthly payments while also potentially eliminating the need to pay mortgage insurance.
In some instances, a lower down payment may be the ideal option. Although you’ll likely have to pay mortgage insurance, making a down payment below 20% also means you don’t need to come up with as large a sum upfront. This can offer financial leeway in terms of buying your home sooner or using some of the extra cash on hand for renovations.
In short, there is no one “ideal” down payment amount; it all depends on your individual financial circumstances and future goals.
How To Save For A Down Payment
Saving up for a down payment, even a lower one, can be a significant financial investment. Here are some strategies to help you reach your down payment goals:
- Set aside a savings budget. Determine how much you need to save — a mortgage calculator can help you determine how much house you can afford. From there, you can calculate a down payment based on your own financial circumstances — and make a plan to save for that amount. You can even choose to automate your savings through your bank or employer.
- Pay off any debt. High-interest debts, such as credit card balances, can quickly snowball and burn through a significant portion of your bank account. Aim to pay off your debts as soon as feasible, especially those with the highest interest rates.
- Look into down payment assistance programs. First-time homebuyers in specific regions may be eligible for state or local down payment assistance, typically in the form of a grant or a zero-interest forgivable loan. These may also be paired with tax breaks or lower mortgage interest rates.
Mortgage Options With Lower Down Payment Requirements
There are several mortgage options that have lower down payment requirements including:
- Conventional loans — Backed by Freddie Mac and Fannie Mae, Conventional loans are a common option for buyers with a credit score of at least 620. First-time buyers or low-income buyers can put down as little as 3% for a primary residence; for most other buyers, a 5% minimum down payment is required. If you put down less than 20% on a Conventional loan, you will need to pay private mortgage insurance (PMI) until your loan-to-value (LTV) ratio reaches 80%.
- FHA loans — For loans backed by the Federal Housing Administration (FHA), you can put down as little as 3.5% if you have a minimum credit score of 580. As is the case with Conventional loans, you will need to pay mortgage insurance for an FHA loan with less than 20% down; this includes an upfront mortgage insurance premium (MIP) at closing, plus an annual premium.
- VA loans — Many members of the armed forces, veterans and their families are eligible for VA loans, backed by the Department of Veteran Affairs. VA loans have a 0% down payment minimum, though you will need to pay a one-time funding fee (typically between 1.4% and 3.6%).
- USDA loans — Buyers looking to purchase in designated rural areas can apply for a U.S. Department of Agriculture (USDA)-backed loan. These loans have a 0% minimum down payment; however, you will have to pay a separate upfront guarantee fee and an annual funding fee.
If you’re not sure which loan is right for you, contact a New American Funding Loan Officer, who can help answer any questions you may have.
New American Funding Helps Make Homeownership Work For Your Finances
New American Funding offers a variety of programs to help make homeownership work for you, including:
- NAF Cash* — NAF Cash, an affiliated company of New American Funding, will purchase your dream home upfront with a cash offer, which tends to be stronger in the eyes of sellers and could help you save on the purchase price. Then, you can purchase the home back at the original price (plus a minor convenience fee).
- 5-Year Rate Protection Pledge. With New American Funding’s 5-Year Rate Protection Pledge, you can purchase (or refinance) a house now and refinance anytime within the next five years if interest rates drop. This refinancing offer comes free of any lender or appraisal fees.
- Buydown Loan. A Buydown Loan offers fixed-rate mortgages that offer a lower payment rate on the first, second and third year — at no additional cost to the buyer. This is a popular option for homeowners looking to save money for renovations in the first few years of the loan.
If you have questions about these programs or any step of the home buying process, you can contact New American Funding for assistance.
With New American Funding’s breadth of programs and customer support to help ensure a good experience, it’s no surprise the mortgage lender continues to rank highly among homeowners. In 2022, New American Funding was recognized as #1 in customer satisfaction among mortgage servicers by the J.D. Power 2022 U.S. Mortgage Servicer Satisfaction Study. The company was able to achieve this prestigious recognition through its dedication to helping every client from every background achieve homeownership.
If you’re ready to venture into homeownership, New American Funding can help you explore your loan options and apply for a mortgage. Contact a Loan Officer to get started today.
*NAF Cash is fulfilled by NAF Cash LLC, an affiliated real estate company of New American Funding that is managed and operated in compliance with applicable legal and regulatory requirements. NAF Cash LLC does not originate loans or issue loan commitments. Terms and Conditions apply. Not available in all states. MI Real Estate Broker #6502431375. 41050 W 11 Mile Rd, Suite 220, Novi, MI, 48375. Phone 844-344-0531.
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