One of the biggest hurdles aspiring home buyers face is saving enough for a down payment, but you may be closer than you think. In a study conducted by NerdWallet, 44% of respondents said a lack of a down payment was the roadblock keeping them from buying a home. Let’s set the record straight and separate fact from fiction on some common down payment myths!
Myth #1: You Need a 20% Down Payment
A 20% down payment is ideal if you want to get off the hook in paying private mortgage insurance also known as PMI. But you do have other down payment options. For qualifying buyers, lenders can offer mortgage options with 10% or 5% down if you’re willing to pay the monthly PMI cost. You can even skip the conventional loan and go for a Federal Housing Administration or FHA loan with only 3.5% down if you qualify. If you choose to buy in a more rural area, you might be eligible for a USDA loan, which requires no down payment. And if you have served in the military, you have a 0% down payment option with a VA loan.
Myth #2: You Shouldn’t Put More Than 20% Down
Maybe you have been quite the eager saver and you could put more than 20% down on your house purchase. Odds are that well-intentioned friend or family member will advise you to only put 20% down and no more. You’re already avoiding PMI, so why put more down? A higher down payment has its advantages including acquiring a lower interest rate. Plus, the more you pay upfront, the less you’re borrowing—which means lower mortgage payments. Compare your options to see if it makes more sense to pay the extra down.
Myth #3: You Can’t Use Gifts for Your Down Payment
If you think you can’t use cash from gifts for your down payment, that’s not necessarily true. Some lenders and some mortgage programs insist that you use your own money, but others are more flexible. Some loans have strict guidelines on how much gift money you can use for a down payment or who can give you the money so it’s important to talk to your Loan Officer about this early in the mortgage process. Also, you will need to get a signed statement from that giver that the money is a gift and not a third-party loan.
Myth #4: Paying Mortgage Insurance is Smarter than Paying a Bigger Down Payment
Taking on the extra cost of mortgage insurance (also known as PMI) seems like a small price to pay in order not to deplete your bank account with a larger down payment. It might not be a big deal, but you’ll want to calculate what you’ll pay in the long run. Before you brush off mortgage insurance, compare your options and know that paying less upfront could mean paying much more over the life of your loan.
Plenty of myths and misconceptions about down payments as well as the whole mortgage process exist in the mortgage industry. Knowing your options and your financial situation will give you a good start in deciding how much money to put down. Finding a knowledgeable Loan Officer helps, too! If you are looking at buying, contact us today and we will get you moving toward your home ownership goals!