Down Payment Myths: How much do I need?
Whether you’re a first time homebuyer or have purchased in the past, there are many questions that go into buying a home. One of the most common questions that we get is: How much down payment do I need to purchase a home? It’s also one of the biggest misconceptions about buying a home that you need a 20% down payment.
In today’s market there are many loan programs available to homebuyers. These options can allow for a buyer to put down as little as 0%, 3%, 3.5% down. In today’s market it’s very common to see a down payment somewhere in the range of 3.5% to 20%. The availability of each of these programs will depend on certain criteria including but not limited to your income and credit. Below is an overview of some of these options.
FHA:
The FHA loan is a government backed mortgage insured by the Federal Housing Administration. This loan option allows for a lower minimum credit score and lower down payment(around 3.5%) than most conventional loans. The current credit score for the 3.5% down payment option is a 580 or higher FICO score. If your FICO score is below 580 you may still qualify but with a 10% down payment.
The caveat with this loan program is that the borrower will also pay mortgage insurance which I have outlined below. Depending on where you live and what type of property you’re buying, there are also loan limits with this option. In Arlington County the FHA loan limits for a single family home are currently $765,000.
Advantages:
- Lower credit score and down payment requirements
- Lower rates
- FHA loans are assumable
Disadvantages:
- Mortgage insurance is required and remains for life of the loan
- Not as strong as conventional for negotiating
Conventional:
A conventional loan may also be referred to as a conforming loan because they meet the down payment and income requirements set by Fannie Mae and Freddie Mac. With this loan type the borrower will generally put anywhere from 5-20% down payment. Anything below 20% will often require mortgage insurance.
Advantages:
- Quick closing which can help with negotiations
- Higher or no loan limits
- Option to pay taxes and insurance directly
- Option to avoid mortgage insurance
Disadvantages:
- Higher credit score required
- Higher down payment required
VHDA:
All VHDA loans have income, net worth, household size, lot size, credit score(620+) and maximum sales price limits based on geographic locations. The program primarily serves first-time homebuyers or someone who has not owned and occupied a primary residence in the last three years.
Advantages:
- 30 year fixed rate loan
- Some programs allow 0% down payment
- Some programs allow down payment grants
Disadvantages:
- Not as strong as conventional for negotiating
- Limiting factors on who can qualify
I’ve copied a link to the VHDA website for specific terms:
https://www.vhda.com/Homebuyers/VHDAHomeLoans/Pages/IncomeSalesPriceLoanLimits.aspx
VA:
The VA loan is a 0% mortgage option available to Veterans, Service Members and select military spouses. VA loans are government backed and do not require mortgage insurance and offer competitive interest rates. With the VA loan, the borrower can roll their funding fee and closing costs into the overall loan amount giving them the ability to close with no money out of pocket.
Advantages:
- No down payment required in most cases
- No mortgage insurance
- Roll closing costs into the loan
- Lower interest rates
- No prepayment penalties
Disadvantages:
- VA appraisal process can be more stringent
- Limiting options for contract negotiations
- Not as strong as conventional for negotiating
Specialty Loan Programs for Doctors:
There is a great loan option for qualified Physicians and Dentists to acquire a residential mortgage loan with zero to little money down and no PMI(mortgage insurance). Not all lenders offer this program and it needs to be acquired through a participating lender.
Pro Tip: The lender that you choose makes a BIG difference in a competitive market.
Stay tuned for Coming Soon articles that may answer some questions that this post may have sparked:
- What is mortgage insurance and how does it help me?
- Which option is strongest for negotiations?
- Does a higher down payment help with negotiations?
- What are Closing Costs and who pays them?
If you have specific questions or would like to set up an in-person meeting to discuss your scenario, please call or email me directly at 703-915-2244 / [email protected]. If you enjoyed this post and would like access to more of my articles/videos, visit the video/blog section of my website at: https://jcurrygroup.com/videos/
Jason Curry
Licensed Realtor: VA & DC
J Curry Group at KW Metro Center
2101 Wilson Blvd #100
Arlington, VA 22201
703-224-6095
