Most Americans need to get a mortgage to buy a home; current statistics state that 87% of home buyers use mortgage financing. But it is rare in 2018 to be able to buy a home for 100% of the purchase price. In most instances banks and lenders want the borrower to have skin in the game, so they require a down payment. It’s no secret that not every borrow will qualify for a mortgage with zero-down payment.
Many people believe that you must have a 20% down payment to buy a home. While having that amount of money down or more is ideal, it is not generally necessary. So how much money do you need to save for a home loan this year? Below is more information.
Find Out How Much Savings Lenders Are Looking for When You Apply for a Mortgage or Home Loan.
A Higher Down Payment Means a Cheaper Mortgage
While you do not need to generally put down 20% for a home loan, remember that the more money you put down, the cheaper the mortgage for most people. With a conventional mortgage that is backed by Fannie Mae or Freddie Mac, there is a strong incentive to put down more than 3% or 5%. The more money you put down above these levels, the lower the rate, fees and the cost of mortgage insurance. If you put down 20% or more, you do not need to pay for mortgage insurance at all.
As home values have been rising in the last two or three years, many first-time home buyers are unable to put down 20% to buy a home. That is why there are many loan products out there that only have a 3% to 5% down payment requirement.
FHA and VA Loans
If you have a lower credit score and black marks on your credit report, such as a foreclosure or bankruptcy, you may find that you are paying a much higher rate for a conventional mortgage. And if you cannot put down more than 10%, your rate will be higher still. Home buyers in this situation may want to consider the FHA or VA loan (the latter is only for active military or military veterans. 100% financing is available with VA loans, which is one of the few 100% financing loans still on the market in 2018).
Government backed loans such as FHA and VA are guaranteed by the federal government. So, lenders are more likely to extend credit to people with lower credit scores and lower down payments. The FHA-insured loan is usually the best option for people with less than a 10% down payment and a credit score in the low 600s or even lower. You can get approved for an FHA loan with a credit score as low as 580, and you only need a down payment of 3.5%. However, you will need to pay for mortgage insurance for the life of the loan with less than a 10% down payment. That is the price of getting FHA financing these days with a low-down payment. Once you have at least 20% equity in the property, it is recommended to refinance out of the FHA mortgage into a conventional loan. But you have to have the credit score to make it worthwhile, or you could pay a much higher rate.
Summary on Required Savings for Mortgage Approvals
If you want to buy a home, especially as a first-time buyer, and you do not have a lot of money for a down payment, getting a low-down payment mortgage is an option. You can often qualify for a home loan with a 3% or 5% down payment. In the case of a conventional loan, you will pay a higher rate with the lower down payment. It may be worth refinancing the loan once you have 20% equity, so you can get a lower rate.
If you have an FHA loan, you only need a 3.5% down payment, but you will probably pay for mortgage insurance for the entire life of the loan.
Buying a home with a low-down payment is definitely possible and even desirable for some people; to save a 20% down payment in some expensive markets could mean paying rent for many years. It may make sense to get a low-down payment loan with a higher rate and/or mortgage insurance than to pay rent for 8 more years as you try to save a big down payment.
Just bear in mind that as with everything, a low-down payment loan has downsides in terms of interest rate and mortgage insurance.