There is a long-standing myth that a 20% down payment is required to purchase a home. Some polls indicate that anywhere from 34-50% of Americans believe they need to put 15-20% down when purchasing their first home. Other polls indicate that only 10% of Americans know they can buy a home with 5% down or less.
One reason for this myth is that the Federal Housing Administration wasn’t founded until 1934 when congress enacted the National housing act to help pull the housing market out of depression. At that time only one in ten households owned their homes. While FHA loans helped some folks it wasn’t until 1957 when the Private Mortgage Industry started which allowed folks to put less than 20% down on homes with conventional loans. Prior to that era, you either needed to do an FHA loan or put 20% down as the bank’s recourse was to foreclose on the home in the event of default and they considered that to be a 20% cost with legal/real estate agent/time fees to recoup the collateral.
Today everyone should be aware that as a first-time homebuyer (defined as someone who has not owned a home in the previous 3 years) purchasing a primary home you can put as little as 3% down on a conventional loan and 3.5% down on a FHA loan. USDA and VA both allow 0% down but they are typically much more challenging to qualify for. In addition to low down payment options there are additional down payment assistance programs, state bond programs, IDA programs, and grants that can all help with down payment and allow you to put as little as 0% down. These programs can have additional requirements and fees.
Minimum down payment requirements are influenced by loan program, loan type (purchase, refinance, cashout refinance) by occupancy (primary, secondary, investment), and by number of units. Below is a chart that shows Loan to Value (LTV) requirements on conforming loans. To clarify 97% LTV means 3% down payment or equity position.
FHA loans are only allowed on primary residences and they can be offered on properties up to 4 units. 3.5% down is required on 1-4 unit properties. FHA does allow up to 96.5% LTV on 2-4 unit properties but please note you must meet a self-sufficiency test showing that 75% of the appraiser’s allocated market rains for the units must be equal to or greater than the total monthly payment. Adding a cosigner impacts these guidelines and requires a 25% down payment on 2-4 units. In addition, there are many lenders that offer a down payment assistance program that helps provide a secondary loan for the 3.5% down payment and even as much as 5% to help cover closing costs allowing buyers to put as little as 0% down on FHA loans.
If you are looking to purchase your first home, or even your next home (conventional loans require 5% down in this circumstance, FHA 3.5% with stipulations) please know that you have low down payment options. While many people fear mortgage insurance, the current price of mortgage insurance is much less than it used to be and there are great options for folks with both excellent credit and folks who are building credit. If you would like to learn more about any of those options, please contact me.