But saving up is hard. In a study conducted by NerdWallet, 44% of respondents said a lack of a down payment was the roadblock keeping them from buying a home.
We're not saying that saving for a down payment will be a cake walk, but separating fact from fiction can go a long way. Here's what you need to know:
Myth No. 1: You need 20% downIn the NerdWallet study, 44% of respondents also believed you need 20% (or more) down to buy a home.
For instance, a Federal Housing Administration (FHA) loan only requires 3.5% down. If either you or your spouse served in the military, you're likely to be eligible for a Veterans Affairs (VA) loan, which can be approved for 0% down. The same goes for United States Department of Agriculture (USDA) loans.
And if you're a qualified buyer, you can get approved for a conventional loan with less than 20% down, but there’s a catch: You’ll be on the hook for private mortgage insurance, or PMI. PMI is paid directly to your lender, not toward your principal. Think of it as insurance you pay to prove to the lender you won’t default on your loan.
Myth No. 2: Paying mortgage insurance is smarter than paying a bigger down paymentPerhaps that mortgage insurance seems like a small price to pay in order not to deplete your bank account and win the house.
It might not be a big deal, but you’ll want to calculate what you'll pay in the long run. Say, for example, you're applying for a conventional loan. If you put less than 20% down, you'll be responsible for paying PMI, but only until the principal balance reaches 78% or less of the original purchase price.
FHA loans, on the other hand, require mortgage insurance for the life of the loan. That means you'll be paying an extra monthly fee for as long as you live in the home or until you pay off the mortgage.
Before you brush off mortgage insurance, compare your options—and know that paying less upfront could mean paying more over the life of your loan.
Myth No. 3: Cash is kingIf you're shopping in a competitive market, you've likely heard horror stories about first-time buyers getting snubbed over investors or all-cash buyers. If you're working with a loan and a small amount down, it might seem like your chances of getting picked over the other guys are slim to none.
There is some truth to this belief. Cash buyers offer one big benefit to a seller: They're guaranteed to close on time with no loan approval hiccups.
On the flip side, “That myth assumes that sellers care most about a fast and certain close, and that’s not always true,” says Casey Fleming, mortgage adviser and author of "The Loan Guide: How to Get the Best Possible Mortgage."
Often, if you make the bigger offer or you write a compelling personal letter that resonates with the seller, you may stand a better chance of getting approved over an all-cash offer.
Fleming’s seen it happen: “I’ve actually beat out all cash offers with 10% down because our offer price was a little higher,” he says. “I’ve also had deals where we were competing against a higher cash offer and the seller took ours because the buyers were a young family wanting to raise their kids in the home—and that meant something to the seller.”
Myth No. 4: Down payment assistance is easyApplying for and getting approved for down payment assistance isn’t always easy. But, it's out there, at least until whatever is allotted has run out.
Locally, you can check the county, State of Maryland and Department of Housing and Urban Development's websites for homeowner assistance options, but you'll have to do some digging.
Your lender should also have suggestions and be able to point you in the right direction.
Myth No. 5: You shouldn't put more than 20% downLet's say you're lucky enough to have saved more than 20% down. After all, now that you've successfully avoided PMI, why fork over more cash than you have to?
A couple of reasons, Fleming says: "First, a higher down payment could signal to your lender that you're a trustworthy borrower and get you a lower interest rate on your mortgage. Plus, the more you pay upfront, the less you're borrowing—which means lower mortgage payments."
But you'll have to put down at least 5% more to see that difference, according to Fleming. "Your interest rate drops a little more with 25% down and even more with 35% down," he says.
Compare your options to see if it makes more sense to pay the extra down or to keep that money in investments that can work for you.
Myth No. 6: You can take out a loan for a down paymentTruth: There's nothing wrong with getting help with your down payment, but it has to be a gift. If a lender suspects the money might be a loan, repaying said loan will be factored into your mortgage approval amount and you’ll qualify for less than you might have wanted.
In order to prove it's a gift, you’ll have to get a letter from the gifters, swearing that they don’t plan on asking for the money back. And don't try to play the system—lying on a mortgage application is a felony.
Please consider The Myers Team your resource for all things real estate. We have over 30 years of real estate experience, specializing in the Montgomery County area. If you are refinancing, want a recommendation, need a service provider or just have a home related question, please give me a call at 301-910-9910 or email me at email@example.com.