What Are Down Payment Options for First-time Homebuyers?

First-time homebuyers should know about the options when it comes to down payments. Learn about down payments and alternatives to putting 20 percent down.

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Down Payment Options for HomebuyersProspective homebuyers may be interested in knowing that they may not have to put 20 percent down when buying a home. When it comes to a conventional mortgage loan, lenders prefer homebuyers put down up to 20 percent, but it is possible to buy a home with less. First-time homebuyers should realize that there are multiple options when it comes to a down payment on a home.

Understand more about down payments and a few mortgage alternatives to putting 20 percent down today.

Your Down Payment and Equity

Lenders prefer that an applicant put down a large down payment. Applicants for home mortgage loans who can put down 20 percent can create some initial equity as part of their home purchase and get a lower interest rate, as well as avoid paying PMI. Oftentimes those applicants are more likely to continue to make mortgage payments and less likely to default on a mortgage loan, so lenders tend to treat them favorably. Lenders do appreciate such applicants and may offer them better rates on a mortgage loan.

This does not mean that others who may only be able to put 5-10 percent down cannot be approved for a mortgage loan. Those who need to make a smaller down payment can still purchase a home, with many first-time homebuyers putting down as low as 6 percent on a home with a traditional mortgage in exchange for higher interest rates and PMI.

Small Down Payment and PMI

Borrowers who elect to offer a small down payment on a conventional loan may be paying more over the lifetime of a loan, despite paying less up front. This will occur in two ways. The loan balance will be larger and interest rates are generally higher than for applicants making larger down payments. Also, those with little initial equity in a home may have to pay Private Mortgage Insurance (PMI). PMI payments go directly to the lender and do not serve to pay down debt. Rather, it's insurance for the lender that buyers won't default on their mortgages. Borrowers putting down 20 percent or more are not obligated to pay PMI.

Small Down Payment Options

There are programs available through a conventional mortgage loan lender that assist those making a small down payment. Products such as Conventional 97, Home Possible® Advantage and HomeReady™ are some products that allow a borrower to pay a mere 3 percent.

An FHA loan is also an option for homeowners who can't pay a larger down payment, as it is one of several loan products that allow for small down payments. Applicants using FHA loans can put down as low as 3.5 percent when buying a home, making them much more accessible. However, anyone who buys a home using an FHA mortgage loan is required to make PMI payments for the entire life of a loan. This is not the case for those applying for a conventional loan who are obligated to pay PMI.

Those that are veterans may want to look into a VA loan, as approved applicants do not have to make a down payment or pay mortgage insurance.

First-time homebuyers can purchase a home without a large down payment. However, some programs may stipulate additional payments and fees. Homebuyers may want to make a small down payment to set aside money for closing or moving costs.

Many Choices for Homebuyers

For some, it is helpful to reduce the balance on a home purchase and get better terms when making a large down payment. For others, it is hard to cover both the down payment and the many expenses associated with a home purchase. These individuals are more comfortable making a smaller down payment while still having some money to cover upcoming expenses, such as closing costs, which range from 2 to 7 percent of the purchase price of a Mt. Juliet home. Review the options before choosing any mortgage loan product.

Posted by Gary Ashton on
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