Are you struggling with the idea of saving for a down payment on your first home? You are not alone. In fact, 44% of potential homebuyers have cited this as the number one obstacle preventing them from making their dream a reality. But fear not, because we are here to help you separate fact from fiction. While it may not be easy, we can guide you through the process and provide you with the essential truths you need to know. Don't let well-meaning but ill-informed advice bog you down any longer. It is time to take control of your home-buying journey.
Myth No. 1: You need 20% down
Did you know that you don't always need a 20% down payment to buy a home? In fact, according to a NerdWallet study, 44% of respondents believed this was the case. However, times have changed.
You can qualify for an FHA loan with only 3.5% down, or even a VA loan with 0% down if you or your spouse served in the military. USDA loans also offer the same opportunity.
If you are a qualified buyer, you can still get approved for a conventional loan with less than 20% down, but private mortgage insurance (PMI) comes into play. This additional cost is paid to the lender directly as insurance in case the borrower defaults. So, while the traditional method of a 20% down payment may have been the norm for decades, there are a variety of options available to you as a potential homebuyer.
Myth No. 2: Paying mortgage insurance is smarter than paying a bigger down payment
Don't be fooled by the seemingly small cost of mortgage insurance. If you are considering putting less than 20% down on a home purchase, it's important to calculate the long-term impact. With conventional loans, you will need to pay PMI until the principal balance hits 78% or less of the original purchase price. However, with FHA loans, mortgage insurance is required for the life of the loan. You'll be paying an extra fee every month until you sell the home or pay off the mortgage. Before dismissing mortgage insurance, do your homework and compare options - a lower upfront cost could result in significantly higher costs over the life of your loan.
Myth No. 3: Cash is king
Are you a first-time buyer struggling to compete with all-cash offers in a cutthroat market? Don't worry, you're not alone. While it's true that cash offers can have an edge in terms of speed and convenience, it's not necessarily a seller's top priority. In fact, there are other factors that can make your offer more attractive, even if you are putting down a smaller amount. So don't give up hope just yet - there are still ways to stand out and win over sellers.
Myth No. 4: Down payment assistance is easy!
If you're hoping to get help with a down payment, we have some news for you. It's not always easy to find and apply for assistance. Unfortunately, there aren't many national or state-run programs available. To find options in your area, you'll need to do some research on the Department of Housing and Urban Development's website. Keep in mind that income is usually a big factor in qualifying for these programs, with a limit typically set at the median income for your county. However, some programs may offer exceptions for special cases, like single parents. If you think you might qualify, your best bet is to get in touch with your local housing authority office. They should be able to point you in the right direction.
Myth No. 5: You should not put more than 20% down
If you've saved more than 20% down payment for your mortgage, don't limit yourself to that amount just because a friend suggested it. Opting for a higher down payment could work to your advantage in various ways. For one, it could boost your creditworthiness and convince lenders to offer you a lower interest rate. Plus, a larger down payment means you're borrowing less, which translates to lower mortgage payments. To note, you need to increase your down payment by at least 5% to experience any significant difference. Higher down payments, such as 25% or 35%, could further decrease your interest rate. Before deciding, weigh your options and compare the benefits of a bigger down payment versus putting your extra cash into investments.
Myth No. 6: You can take out a loan for a down payment
Did you know that receiving help with your down payment is acceptable, but it must be a gift? If a lender suspects that the funds are a loan, your ability to repay that loan will be considered during mortgage approval, leading to a lower amount than you had hoped for. However, if you can obtain a letter from the gifters affirming that they do not intend to seek repayment, you can prove it was a gift. Remember, honesty is key - falsifying information on a mortgage application is a felony offense.
