Perhaps one of the most common real estate myths out there is that you must make a 20% down payment to get a home loan. This coupled with interest rates rising to normal levels after months of record lows, and home prices that continue to rise has led many would-be buyers to hold off on home purchases.
The important thing to note before we dive in here is that no one should ever purchase a home if they aren't able to reliably afford the payments, regardless of how good the market is.
What is a down payment?
A down payment is simply a portion of a loan paid up front.
Where is this myth from?
The source of the confusion here is that when a homeowner has less than 20% equity most lenders require the borrower to pay PMI (private mortgage insurance). If you are able to afford a 20% down payment you avoid paying a monthly fee that does nothing to help you build equity. But the fact is most buyers don't have the cash on hand to put 20% down, and even if they do it's not always the best option for everyone.
How much money down do you need for a down payment?
The answer to this question gets complicated pretty quickly when you move outside of the standard loan types so let's hone in on two common home loans.
Conventional loans- Investopedia says it best "A conventional mortgage or conventional loan is any type of home buyer’s loan that is not offered or secured by a government entity. Instead, conventional mortgages are available through private lenders, such as banks, credit unions, and mortgage companies." In short- its a loan that is made directly by a private lender to a borrower. Since they aren't guaranteed by the government they tend to have stricter requirements to help minimize risk for the lender.
These loans typically carry a minimum of 5% down. Which means you can get a loan for a $300,000 with just $15,000 as your downpayment.
FHA loans- an FHA loan is essentially a loan that is secured by the government. They tend to have looser guidelines for potential borrowers, so to offset the risk to the lender while lowering the bar to homeownership the US Government guarantees the loan and protects the lender from losses with insurance . FHA loans lower the bar to homeownership by reducing the cost of entry.
Are there other kinds of loans?
There's a lot of terminology surrounding loans that can be hard to wrap your head around. There are dozens of different types of loans available that can be broken down into two categories: conforming and non-conforming. Many people confuse "conventional" with "conforming" loans, and while there is considerable overlap between the two they aren't the same. Even among conventional loans there are different options.
Some banks have grants or special loan programs that offer conventional loans for as little as 1% down. Others offer grants to help reduce the cost to the buyer by giving money towards a down payment or closing costs. And there are some loans like USDA and VA loans that offer a chance to put 0% down for qualified buyers.
If you want to know more about how to buy a home for 1% down don't hesitate to reach out to us and speak with one of our qualified agents!