For most first-time home buyers, saving enough money for a down payment is the biggest hurdle to owning a home. Traditionally, lenders have required a down payment of at least 20% of the home’s purchase price, which can be daunting for many. However, many lenders will now accept less than 20% of the home’s purchase price if the borrower also pays for private mortgage insurance (PMI). In addition, there are several innovative programs available where it is possible to put down anywhere from 0% to 3% of the value of a home and still qualify for a mortgage.
The real question is — how much should you put down? Should you aim for the traditional 20% or should you put down less?
Ultimately, your decision will be dictated by your financial situation, the amount and type of loan you and your home qualifies for, and your preferences.
If you’re financially secure, there are definitely some advantages to putting 20% down. For one, you immediately have substantial equity in your home. This may be important to you psychologically, and that counts. In addition, you’ll avoid having to pay the additional cost of private mortgage insurance. Those with the money may still opt for a mortgage that requires as little down as possible, simply so that they will have that much more in the bank, which they can then invest in the home itself, or in a savings or retirement account.
This can be especially true if you and your chosen home are eligible for government-funded mortgage programs such as FHA, VA or USDA loans, which offer either low or no down payment options.
Private mortgage insurance protects a lender in the event that you default on the loan. Lenders generally require mortgage insurance on loans with low down payments because experience shows that a borrower with less than 20% invested in a house is more likely to default on a mortgage.
Mortgage insurance also enables lenders to grant loans that would otherwise be considered too risky to be purchased by third-party investors like the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The ability to have a market for non-conforming mortgages means that lenders can loan more money to people like you.
The good news about PMI is that you don’t have to pay it forever. You can usually cancel it after you have built up at least 20% equity in your home. Maple Tree Funding’s licensed mortgage brokers can assist you with any questions you may have about PMI and how long you will have to pay for it.
Understanding your mortgage options and choosing which is right for you can be a daunting task.
At Maple Tree Funding, our dedicated team of licensed mortgage professionals can help you find the best mortgage at the best rate based on your unique circumstances, even if your a first-time buyer. In fact, we can even help those who have been turned away elsewhere for ‘bad credit’.
Editor’s Note: This content was originally published in 2014 but has been updated as of July 2016.