Know your options
Down payments are your initial investment in your new home. Right Choice Mortgage offers numerous home loan programs and options so that you can decide what investment amount is best for you. Jackie will explain the low down payment programs and show you ways that you can avoid expensive private mortgage insurance premiums.
What is a down payment & why does it matter?
A down payment is a percentage of your home loan paid up front. Depending on the type of loan you choose, down payment requirements vary from 0 – 20% down. For example, if you are a veteran and you qualify for a VA loan, no down payment is required. Traditional conventional loans in the past always required 20% down payments.
Down payments are important for the following reasons:
- Your down payment directly affects which loan program is best for you. Different loan programs require different down payment percentages. Traditionally, the lowest down payment options have been FHA loans which require down payments as low as 3 ½ %. In the last year, conventional loans have been getting more flexible and now there are options for as low as 3% down!
- Mortgage insurance requirements depend on the size of your down payment. If you choose a low down payment option, your loan is considered to be a larger risk to the lender and mortgage insurance will be required. Mortgage insurance can be paid as a separate cost along with your mortgage payment or it can be built into the rate. If you have access to the funds and can afford a 20% down payment, you can avoid mortgage insurance premiums.
- Your credit score is the biggest factor in getting the best interest rate, but the amount of your down payment also helps determine the rate you will pay. A larger down payment = More skin in the game = less risk = a better rate with a larger down payment.
Besides paying Mortgage Insurance for a down payment less than 20%, another cost to consider is the increase in closing costs with a smaller down payment.
If you are an eligible Veteran, you can qualify for a no money down VA loan. However, the Veterans Administration requires a “Funding Fee” as does the FHA loan program. The fee is a percentage of the loan amount which is added to your loan balance, and this percentage varies depending on your eligibility and government guidelines.
Strategies for Down Payment
Buying a home is most likely the largest purchase you will make in your lifetime, so your down payment can be sizable. Jackie will work with you and help you choose the best option based on your financial situation. Here are 3 ways to help make your dreams of home ownership come true:
- Gift Funds. Be nice to your family members! Gifts are Ok for a down payment for many programs.
- Down payment assistance programs. State programs have down payment assistance for certain income brackets. Some programs offer grants or deferred payments.
- Borrow from your 401k or IRA. If you’ve never owned a house, consider tapping into your IRA to come up with the funds needed. The IRS allows up to $10,000 in IRA funds as a down payment if you are a new homebuyer and waives the early withdrawal penalty. Homebuyers can also borrow against their 401k without a penalty and pay back the loan within a specified period. Be sure to discuss with your CPA before making final decisions.