If you’re thinking about buying your first home, that pesky down payment has probably kept you awake more than a few nights. We get it—while a pre-approval is crucial for determining your buying power, it’s the down payment that shows you mean business. 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 the truth you need to know.
Myth #1: You Need 20% Down:
The 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 essentially as insurance you pay to prove to the lender you won’t default on your loan.
Myth #2: Paying Mortgage Insurance Is Smarter Than Paying a Bigger Down Payment:
Perhaps that mortgage insurance seems like a small price to pay in order not to deplete your bank account and win the house. So what if you make some additional payments for a while? It might not be a big deal, but you’ll want to calculate what you’ll pay in the long run. Take, for example, conventional loans. If you put less than 20% down, you’ll get stuck with 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).
Myth #3: Cash Is King:
If 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 offers offer one big benefit to a seller, they’re guaranteed to close on time. In addition, there is no potential for loan approval hiccups. Often, if you make the bigger offer, or you write a killer personal letter that resonates with the seller, you stand a better chance of getting approved over an all-cash offer. Our team at Corken + Company, with over 20 years of experience, can help to ensure that you write an offer that is competitive, without putting you at risk.
Myth#4: You Shouldn’t Put More Than 20% Down:
Let’s say you’re lucky enough to have saved more than 20% down. Odds are good some well-meaning friend is going to tell you to put only 20% down—no more, no less. After all, now that you’ve successfully avoided PMI, why fork over more cash than you have to? A couple of reasons. 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.
Myth#5: You Can Take out a Loan for a Down Payment
Truth: 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. In addition, 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. This will help to ensure that they don’t plan on asking for the money back. And don’t try to game the system—lying on a mortgage application is a felony.
Information is power. We here at Corken + Company want our clients to have all the right information at their disposal, this way you can make the wisest financial decision for you and your family. Let us help you find your dream home today!
Contributions from: realtor.com
