For millions of Americans, the idea of saving upwards of 20% for a down payment on a traditional mortgage seems impossible. After spending hundreds or even thousands of dollars on rent each month, you may not have much left over for a substantial down payment on your own property.
What are your options?
First let’s discuss what all these terms mean. A down payment is any amount of money that you pay up-front toward the principal (the total amount of your loan). In general, the more money you can put down, the better: smaller loans mean lower monthly payments.
For the best mortgage rates on a conventional mortgage, a higher down payment (between 15-20%) is ideal, but not necessarily required. Many home-buyers put down between 10-15%, and some pay as little as 3-5% down. What most people don’t realize is that it is possible to purchase a home with no down payment at all.
No down payment mortgages are loans that require zero money down. After the housing crisis of the early 2000s, no down payment mortgages became nearly impossible to come by, but you can still find them.
These are often available with no money down. If you are active duty or retired military, you may be eligible for this kind of loan through the Department of Veteran’s Affairs.
For non-military personnel, the U.S. Department of Agriculture also offers low and no down payment mortgages. These USDA loans are referred to as Rural Housing Loans; they are designed for “low to moderate income homebuyers.”
USDA loans are often available in smaller suburbs and even college towns, not just rural areas. You can check the eligibility of your neighborhood on the USDA website.
The 80/20 mortgage
If you are not eligible for the VA or USDA programs and have great credit, you may qualify for an 80/20 mortgage, where the property’s cost is split into two loans—one for 80% of the total and the other for 20%, which effectively becomes the down payment. Keep in mind that the interest rate on the second loan will likely be higher, and you will be paying two separate bills each month.
Be mindful that fully financing your home means you will likely be paying it off longer. Those extra months or years of payments can really add up in interest over the life of your loan. It also means you will not have any equity in your home, making you ineligible for home equity loans. Even so, no down payment mortgages make it easier for you to get into your own home faster. Speak to a trusted mortgage broker today to see what options are available to your family.
Sources: bankrate.com, themortgagereports.com, eligibility.sc.egov.usda.gov
Learn something new? Want to pass an idea to a friend?
Share the knowledge with your network!