Housing & Mortgage
Your Down Payment Fears are Overblown
Fannie Mae and Freddie Mac dropped down payment minimums to 3% – how to scrape together $10,000
Renters are talking themselves out of buying a home, based on some seriously faulty logic. About half of renters in a recent survey said they would need a down payment of at least 20% to get a mortgage.
With the median-priced house pushing past $270,000, even a diligent saver would likely find it a stretch to come up with $55,000 in cash. In higher priced markets, a 20% down payment would be a serious deal breaker.
But here’s the great news: You don’t need 20% down. You don’t even need 10%. Chances are you can get a mortgage with a down payment of less than 5%.
No crazy strings attached. No insane qualifying hoops to jump through. Straight-up, nationally available mortgages are available if you can come to the table with at least 3% of the purchase price in cash.
Yep, 3%, and your banker might not have told you that.
That’s a whole lot more doable, right? On the median priced home, that could mean needing less than $10,000. Before you talk yourself out of even that smaller down payment, let’s break this down. Save $800 a month and you’re at roughly $10,000 in a year. That’s not nothing, but ask yourself: Could you possibly reduce spending by $200 a week, $30 a day?
Bag lunches. Drop the gym for a year and improvise at home or in the park. Got two car payments? You sure you and your significant other can’t manage with one car? You get the idea.
The myth of the 20% down payment
So why are so many renters certain they need 20% down? Well, it is the gold standard; come to the table with 20% and you will likely be in line for the best possible deal. That’s why most mortgage calculators, including those on popular real estate listing sites, default to 20%. (You can crank that down!)
But it’s the rare household that has 20% for a down payment. The median down payment in 2017 was around 7%.
To be clear, there are trade-offs with low down payment loans. You probably aren’t going to get the lowest-of-low interest rate. After all, in a lender’s eyes you are more of a risk. You might just qualify for a very good rate, not the absolute best. Seems reasonable, eh?
And anyone who makes a down payment of less than 20% will have to pay for mortgage insurance. There are different insurance programs for different types of low down payment loans. For some, your credit score will come into play. But generally a down payment of 3% or 3.5% might tack on an extra 0.60% to 1.5% a month in payments, and you can roll the cost into your monthly mortgage payment.
The lowdown on low down payments
Without boring you with a long trip through the lending weeds, it’s important to understand one key element of the mortgage business: Many mortgages adhere to rules put out by Fannie Mae and Freddie Mac. (Official names: Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.) Fannie and Freddie are quasi-government agencies that provide financial guarantees to lenders.
Fannie and Freddie have changed their down payment rules recently and now will back a mortgage with a down payment of just 3%.
Another low down payment option is a loan backed by the Federal Housing Administration (FHA). These too are available nationally and require a 3.5% down payment.
There are no income limits with either a conventional mortgage backed by Fannie or Freddie, or an FHA-insured loan. That said, there is a ceiling on how much you can borrow. For conventional mortgages, it is typically $484,350 in most regions. In high cost areas, it can be as much as $726,525. FHA-insured mortgage limits are tied to regional prices. In 2019 they can range from $294,515 to $679,640.
Need to borrow more than those limits? You will likely need what’s called a jumbo mortgage. If you have a solid financial record – good credit scores, stable job, etc. – you may be able to snag a jumbo with a down payment of just 10% or so.