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Know your down payment options: Why 20% is no longer king

What we'll cover

  • Why you may not have to put 20% down

  • Your down payment options

  • Why you might need Private Mortgage Insurance

If you’re shopping for a new home, someone might’ve mentioned the golden rule of homebuying: You must make a 20% down payment to secure a mortgage.

For decades, the gold standard was a 20% down payment. Today, you may mistakenly believe that, until you have socked that much away, your hopes for home ownership are dim. And while making a down payment that large is a good target to aim for,  20% down isn't the only option for home ownership.

If it’s not a requirement, what are your down payment options? Let’s take a look.

The download on down payment options

Homebuyers can now choose from a range of financing options that allow them to put down as little as 3% of the home’s purchase price. And some options enable you to secure a mortgage with no down payment at all. In fact, according to the Federal Home Loan Mortgage Corporation (also known as Freddie Mac), 40% of today’s buyers make down payments of less than 10%.

To keep your American dream of home ownership alive, take a look at these low down payment options:

  • FHA loans: The Federal Housing Administration (which, as the name implies, is a government agency) works with certain lenders to help homebuyers, especially first-time buyers, obtain home loans. You can get an FHA loan with as little as 3.5% down, and the rates are among the lowest.

  • Freddie Mac and Fannie Mae loans: Two government-sponsored enterprises, the Federal National Mortgage Association (Fannie Mae for short) and the aforementioned Freddie Mac, offer home loans with as little as 3% down. For example, Fannie Mae’s  HomeReady Program  is one option for low- to moderate-income borrowers who have limited down payments or other unique circumstances.

  • Loans for service members: The Department of Veterans Affairs (the VA) works with some lenders to guarantee loans with 0% down for qualified veterans, active-duty service members, and some members of the National Guard and Reserves. Similarly, the Navy Federal Credit Union (the nation’s largest credit union) offers 0% down payment loans to qualified members and their family members.

  • Loans for rural residents: The United States Department of Agriculture (USDA) sponsors a popular program to increase access to home ownership in rural areas by working with lenders to provide 0% down payment rural development loans. These loans aren’t restricted to the purchase of farmland, but they do have some income restrictions.

Not every lender will offer all of these types of loans, so check which options are available through your lender. Ally Home Loans offers the HomeReady Program as an option for borrowers who meet the requirements.

Private mortgage insurance can help.

Finally, if you have a good credit score and/or don’t qualify for one of the above loan options (for one reason or another), you can still make a low down payment and be approved for a mortgage. But you’ll likely need to get private mortgage insurance (PMI).

PMI functions as an insurance policy for your lender, protecting them in case you’re unable to make your mortgage payment.

Borrowers pay a monthly PMI fee as part of their monthly mortgage payment. PMI costs vary depending on your credit score and your loan-to-value ratio, which is the value of your house compared to the mortgage balance.

While PMI will increase your monthly costs in the short term, you aren’t required to maintain coverage the entire lifespan of your loan. Once you have paid down your mortgage loan and have 22% equity in your home’s purchased value, it will be cancelled automatically. Consider making additional principle payments to get there sooner, or you can even request cancellation when you have 20% equity, though it's not guaranteed.

The bottom line on down payments

Of course, the more you can “put down” on your home, the better. Down payments of at least 20% can mean lower monthly mortgage payments, a better hedge against declines in real estate values, and often, better interest rates, fewer upfront fees, and lower closing costs. Luckily, if you find saving for a large down payment is difficult, there’s a range of affordable down payment loan and even no down payment loan options to keep you from being locked out of a new home.

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