It is possible to buy a house with less than a 20% down payment.
One of the most frequent and often biggest hurdles when assisting potential home buyers is their lack of a 20% down payment, combined with their desire or need to keep their payment as low as possible. Typically their credit scores are pretty good, say mid 700’s or so, and they otherwise qualify nicely for a mortgage. They come to me wanting to buy a house, but thinking it’s not at all possible because they believe their only choice is to buy with using a low down payment FHA loan and then pay the staggering and never-ending mortgage insurance.
Over the past several months, the loan officer with whom I work most frequently has suggested to some of my clients that they consider using lender-paid private mortgage insurance rather than trying to save an additional 10% or even 15% in order to buy with a 20% down payment. The lender-paid option bumps their interest rate up an eighth or quarter of a percent, but still brings their monthly payment in less than it would be were they to pay mortgage insurance each month. That means they can shop for a bit more house and still keep their monthly payments at goal!
There are a number of calculators available that can help you determine whether it makes sense to use the lender-paid mortgage insurance option. For example, FHA.com includes a very helpful calculator that includes a mortgage insurance payment. Here’s a typical scenario in my area:
- House price: $200,000
- Property taxes: about $2,600 a year, which is 1.3% of the price or approximately $216 a month
- Homeowner’s Insurance: about $600 a year, or $50 a month
- Typical minimum 3.5% down payment
- With good credit of say mid-700’s, interest rate might in in the neighborhood of say, 4% or so (or maybe lower … or maybe higher depending on the day)
Anyway … plug all of that in to the FHA calculator and you’ll see a monthly payment of approximately $1,400 a month.
Now assume lender-paid private mortgage insurance. Using my favorite loan officer’s calculator with the same approximate scenario, an interest rate of maybe 4.25% and down payment of, say, 5%, this brings the payment to just over $1,200 a month! Higher interest rate, lower payment.
Remember that I’m using a very rough scenario here and that there are certainly other factors to consider … but it’s important to remember that there ARE options and you can buy with less down payment than you think. It is possible to buy a house with less than a 20% down payment.
(By the way, in my area there are also programs that can assist you should you not have sufficient down payment … but that’s a subject for another blog post.)
Here’s the disclaimer: I’m not a loan officer, I’m a Realtor®. You absolutely need to talk to a lender to get the real numbers. I love my loan officer, Amanda Finnegan, especially since she’s honest, accessible, well qualified, and her bank (HomeStreet Bank), typically doesn’t sell their loans.
(Amanda’s temporarily out on maternity leave, but’ll be back in early December … contact her anyway, or contact me.)
