Thinking about buying vs. renting? There’s a lot of information out there, where do you start? You could join us at one of our monthly free virtual homebuyer workshops, and you can check out this blog! Both will help you take those first steps to understanding the process of how buying a home is going to be one of the best moves you make.
Loans aren’t one-size-fits-all
Before we talk about how much to put down, let’s talk about types of loans. We’re going to give you a high-level overview as there are so many details and different loan types to dive into. Each buyer’s situation is unique and your lender can help you understand the options and what is going to be best for your home-buying journey.
Conventional Loans
When people talk about mortgage loans in general they are often referring to a conventional loan. They tend to be for 30 years, but you can also look at 15 or 20-year terms. The better your credit score the better your rate will be. One more important note regarding conventional loans - when putting down less than 20%, you’ll often pay Private Mortgage Insurance (PMI). We’ll talk more about PMI in a bit. Jumbo loans and Adjustable Rate Mortgages (ARMs) also fall into the category of conventional loans but they are “non conforming”. These loans are often held directly by the lender and they do not conform to the government standards (Fannie Mae and Freddie Mac Loans).
Government Loans
Government-backed FHA, and VA loans are also popular. Typically, you can qualify for an FHA loan with a lower credit score than you can with conventional loans. It may have a slightly lower interest rate than a conventional loan but depending on the amount you put down, you may pay PMI for the life of the loan. Appraisals are stricter with an FHA loan as the safety and soundness of the home is considered as well. For active-duty military service members or veterans who meet length of service requirements, there are VA loans that don’t require a downpayment and usually don’t require PMI.
What is PMI?
In most cases when you put less than 20% down, you’ll often have to pay what is called Private Mortgage Insurance (PMI). This is an additional fee that is rolled into your monthly mortgage payment and it is designed to protect the lender if you falter on your mortgage payments. PMI today isn’t what it used to be back in the 80s, 90s, or even the early aughts. Back then, there were only about two companies that provided PMI, and you could expect a hefty monthly price tag. Today, there are more PMI providers so prices have come down and it has leveled the playing field. The same loan back in the day could have run you about $350 PMI for a month whereas today it could be as low as $80 a month. PMI is determined by your financial factors including credit score so the rate will be specifically calculated using your information. If using a conventional mortgage, once you have reached the 20% equity threshold you can cancel your PMI. If the home values in your neighborhood increase more swiftly than the payoff schedule, you can also look to refinance to help remove the PMI.
What can your wallet afford?
The biggest misconception is that you MUST put 20% down when purchasing a home. In fact, you can put as little as 3% down on a home with a conventional mortgage. With certain homebuying programs, you can put down as little as $1,000! Putting a larger amount down, especially when interest rates are higher, allows for a smaller loan, therefore paying less interest, and making your monthly payment more affordable. Remember you avoid paying PMI when putting down 20% or more.
We can help you discover loan programs that help offset the cost of PMI or exempt the PMI altogether. For example, you may qualify for a doctor or VA loan that can offer 100% financing (that means 0% down!) with no PMI. Once again, it all depends on your personal financial details. We’ll connect you with the right local lenders to provide the loan that supports your circumstances best.
Don’t forget about closing costs
Aside from your down payment and monthly mortgage payment, there’s another big number you need to calculate when buying a home - closing costs. These include fees such as transfer taxes, inspection fees, and title insurance, among others. They’re bundled together and included in the cash that you need to bring to the closing table. In the Philadelphia area, closing costs are estimated to be about 5% of the price of the home. For example, a $350,000 property will have an estimated $17,500 in closing costs. This is another reason that many buyers may put less than 20% down on a home. The good news is that there are grants and homebuying programs that can help you bring down those closing costs. Your agent may also be able to negotiate a seller’s assist which applies to your closing costs.
Let’s meet for coffee, or at our office for a one-on-one. We’ll have a relaxed conversation where we’ll discuss the points above, as well as your timeline, target price range, and must-have list, and learn about your hopes, dreams, and worries around becoming a homeowner. Fill out the form below and let’s take the next steps to get this home journey started!
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