Catlin Capital lets you know that homebuyers don’t need to put 20% down
It’s a common misconception that “20 percent down” is required to buy a home. And, while that may have been true at some point in history, it hasn’t been so since 1934.
In today’s real estate market, homebuyers don’t need to make a 20% down payment. Many believe that they do, however — despite the obvious risks.
The likely reason buyers believe 20% down is required is because, without 20 percent, you’ll have to pay for mortgage insurance. But that’s not necessarily a bad thing.
PMI is not evil
Private mortgage insurance (PMI) is neither good nor bad, but many home buyers still try to avoid it at all costs.
The purpose of private mortgage insurance is to protect the lender in the event of foreclosure — that’s all it’s for. However, because it costs homeowners money, PMI gets a bad rap.
At Catlin Capital, we’re letting you know that it shouldn’t.
Because of private mortgage insurance, many homebuyers can get approved with less than 20% down. And, eventually, private mortgage insurance can be removed without having to refinance.
At the rate today’s home values are increasing, a buyer putting 3% down might pay PMI for fewer than four years.
That’s not long at all. Yet many buyers — especially first-timers — will put off a purchase because they want to save up 20 percent.
Meanwhile, home values are climbing.
For today’s home buyers, the size of the down payment shouldn’t be the only consideration.
This is because home affordability is not about the size of your down payment — it’s about whether you can manage the monthly payments and still have cash left over for “life.”
A large down payment will lower your loan amount, and therefore will give you a smaller monthly mortgage payment. However, if you’ve depleted your life savings in order to make that large down payment, you’ve put yourself at risk.
Don’t deplete your entire savings
When the majority of your money is tied up in a home, financial experts refer to it as being “house-poor.”
When you’re house-poor, you have plenty of money on paper but little cash available for everyday living expenses and emergencies.
And, as every homeowner will tell you, emergencies happen.
Roofs collapse, water heaters break, and you could become ill and cannot work. Insurance can help you with these issues sometimes, but not always.
That’s why being house-poor is so dangerous.
Many people believe it’s financially conservative to put 20% down on a home. If 20% is all the savings you have, though, using the full amount for a down payment is the opposite of being financially conservative.
The true financially conservative option is to make a small down payment and leave yourself with some money in the bank. Being house-poor is no way to live.
First-Time Home Buyers: Catlin Capital can help you buy a house with as little as 3% Down
Low down payment first-time home buyer loans
Low down payment: Conventional loan 97 (3% down)
The Conventional 97 program is available from Fannie Mae and Freddie Mac. It’s a 3% down payment program and, for many homebuyers, it’s a less expensive loan option than an FHA mortgage.
Basic qualification requirements for a Conventional 97 loan include:
Must not have owned a home in at least the last 3 years
Loan size may not exceed $647,200, even if the home is in a high-cost market
The property must be a single-unit dwelling. No multi-unit homes are allowed
The mortgage must be a fixed-rate mortgage. No adjustable-rate mortgages are allowed via the Conventional 97
The Conventional 97 program does not enforce a specific minimum credit score beyond those for a typical conventional home loan.
In addition, the Conventional 97 mortgage allows for the entire 3% down payment to come from gifted funds, so long as the gifter is related by blood or marriage, legal guardianship, domestic partnership, or is a fiance/fiancee.
Low down payment: Conventional mortgage (5% down)
Catlin Capital notes that the Conventional 97 loans are a little more restrictive than ‘standard’ conventional loans because they’re intended for first-time homebuyers who need extra help qualifying.
We advise that if you don’t meet the guidelines for a Conventional 97 loan, you can save up a little more and try for a standard conventional mortgage.
Conventional mortgages are the most popular loan type in the market because they’re incredibly flexible. You can make a down payment as low as 5% or as big as 20%+. And you only need a 620 credit score to qualify in many cases.
Plus, conventional loan limits are higher than FHA loan limits, monthly PMI is generally much less expensive and there is no Upfront PMI cost.
Catlin Capital, mortgage down payment FAQ
Here are answers to some of the most frequently asked questions about mortgage down payments. Catlin Capital is here to help you.
What is the minimum down payment for a mortgage?
Conventional loans start at 3 percent down for ‘first-time’ home buyers, 5% down for others. You are free to contribute more than the minimum down payment amount if you want.
Can gifts be used as a down payment?
Yes, gifts can be used for a down payment on a home. But you must follow your lender’s procedures when receiving a gift. First, make sure the gift is made using a personal check, a cashier’s check, or a wire. Second, keep paper records of the gift, including photocopies of the checks and of your deposit to the bank. And make sure your deposit matches the amount of the gift exactly. Your lender will also want to verify that the gift is actually a gift via a signed gift letter. Gifts can not require repayment.
What are the benefits of putting more money down?
Just as there are benefits to low-down mortgages, there are benefits to putting more money down on a home purchase. For example, more money down means a smaller loan amount — which reduces your monthly mortgage payment. Additionally, if your loan still requires mortgage insurance, with more money down, your mortgage insurance will cost less and be removed in fewer years.
If I make a low down payment, do I pay mortgage insurance?
Mortgage insurance is typically required with less than 20 percent down, but not always. For example, the VA Home Loan Guaranty program doesn’t require monthly mortgage insurance, but does have an associated ‘funding fee’ cost. Conversely, FHA and USDA loans always require mortgage insurance. So even with large down payments, you’ll have a monthly MI charge. The only loan for which your down payment amount affects your monthly mortgage insurance cost is the conventional mortgage. The smaller your down payment, the higher your monthly PMI.
How can I fund a down payment?
A down payment can be funded in multiple ways, and lenders are often flexible. Some of the more common ways to fund a down payment are to use your savings or checking account, or, for repeat buyers, the proceeds from the sale of your existing home.
However, there are other ways to fund a down payment, too.
For example, homebuyers can receive a gift for their down payment from family or borrow from their 401k or IRA (although that’s not always wise).
Regardless of how you fund your down payment, make sure to keep a paper trail. Without a clear account of the source of your down payment, a mortgage lender may not allow its use.
How much home can I afford?
The answer to the question “How much home can I afford?” is a personal one and should not be left solely to your mortgage broker.
The best way to determine how much house you can afford is to start with your monthly budget and decide what you can comfortably pay for a home each month.
Then, using your desired payment as the starting point, use our mortgage calculator and work backward to find your maximum home purchase price, keeping in mind estimates for the property taxes and home insurance premiums.
Note that today’s mortgage rates will affect your mortgage calculations, so be sure to use current mortgage rates in your estimate. When mortgage rates change, so does home affordability.
What are today’s mortgage rates?