You’re ready to apply for a mortgage loan. Your credit scores are high. Your debt-to-income ratio is low. And you have the employment history that makes you an attractive borrower in the eyes of mortgage lenders.
There’s just one problem: You don’t have enough money to come up with a down payment of 20% of your home’s purchase price.
The standard rule is that you need a 20% down payment when you are applying for a conventional mortgage, a loan not insured by the federal government. There’s a reason for this bit of conventional wisdom: If you don’t come up with this 20% down, you’ll probably have to pay for private mortgage insurance, which can cost from 0.5% to 1% of your total loan each year. If you borrow $200,000, private mortgage insurance can cost you from $1,000 to $2,000 a year until you build up enough equity to cancel it.
Here’s some good news, though: You don’t really need 20% down to qualify for a mortgage loan. There are plenty of government programs that allow you to qualify for a mortgage loan with less. You’ll also find that many banks and lenders will loan you mortgage dollars even if you can only come up with a down payment of 5%.
Just make sure that you have strong credit and income. The better your financials are, the more likely you are to qualify for a mortgage loan with a lower down payment.
If you can afford a down payment of 20%? That’s probably your best move. It allows you to avoid private mortgage insurance and it helps you quickly build equity in your home, which could help if your home’s value suddenly drops.
“While there are mortgage loans that allow less than 20% down, I would discourage it,” says Dan Serra, a certified financial planner from Bethesda, Maryland. “The 20% down to me is a good insurance policy against an unexpected drop in home values in which the homeowner could be trapped with negative equity. I saw this contribute to a lack of mobility for homeowners who had to pass up opportunities to move for a better job or to be closer to family.”
If you can’t afford a 20% down payment — and for that $200,000 mortgage a down payment of 20% comes out to a whopping $40,000 — here are some options for loans that require smaller down payments.
Learn more details about these options that can help you qualify for a small downpayment. Continue reading full article here.