Down Payments

The majority of homebuyers in today’s market don’t make down payments anywhere near 20%, which was what was once required. When the large down payment became a hurdle too large for most homebuyers to overcome, 3.5% down FHA was introduced and provided a relief from unaffordable large down payments. Today, one in five home sales are insured by FHA. The emergence of low-down payment loans like FHA and 97% conventional and no-down payment loans USDA and VA have given buyers another option when purchasing a new home. Even buyers who can afford a down payment choose a low-cost option because they want to save their cash for other things like home improvement and potential future expenses.

There are benefits to making large down payments. For instance, loans with a 20% or greater down payment don’t require mortgage insurance. Certain mortgages also offer lower rates to buyers making large down payments. Buyers who plan to resell quickly will get a better return on their sale if they buy more equity in the beginning, as well. But for many buyers, the benefits of low-cost mortgages outweigh those of mortgages with larger down payments.

Despite being a low-cost mortgage with just 3.5% down, FHA mortgage rates still range among the lowest on the market. Mortgage insurance and the guarantee of FHA keep risks minimal and rates low. All FHA loans require mortgage insurance. If a down payment greater than 10% is paid, mortgage insurance is just required for 11 years. If the down payment is less than 10%, insurance is required for the life of the loan. Mortgage insurance is what helps keep rates low by protecting the lender against mortgage defaults. With more protection, banks are able to lend more securely to riskier buyers. FHA homeowners have the option to eventually refinance out of mortgage insurance.

Zero-down USDA loans require mortgage insurance for the life of the loan, but instead of mortgage insurance, the coverage is paid via a guarantee fee. The USDA guarantee fee is broken into two parts: an upfront fee of 1.00% of the purchase price and an annual fee of .35%. Both fees are rolled into the loan total and paid with the mortgage payments. Despite being a 100% financing loan, USDA’s guarantee fees are even lower than 3.5% down FHA. In comparison, FHA’s mortgage insurance consists of a 1.75% upfront fee due at closing and a 0.85% annual fee. Depending on the loan size, a USDA buyer can potentially save hundreds in monthly mortgage insurance costs.

Like USDA, VA loan are zero-down payment, low cost mortgages. Unlike other loan programs, this one is only available to veterans and active members of the U.S. military. For qualified veterans the VA loan offers excellent benefits like 100%, no required mortgage insurance, and low mortgage rates.

Buying a home doesn’t have to break the bank anymore. Zero-down and low-cost mortgages have made homeownership more affordable than ever.