Can You Buy a Home With Less Than 20% Down?

Miadavis
4 min readApr 26, 2022

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You may have heard that you need at least 20% down to buy a home. Unfortunately, that’s not necessarily true anymore. Florida Mortgage Company has different loan programs that allow you to put down as little as 3% or even zero. Therefore, it is possible to buy a home with less than 20% down in today’s market. However, there are inevitable trade-offs involved in doing so.

What is a down payment?

You required a handsome amount of cash to purchase a house in earlier times. Then homeownership was a status of pride and an unachievable dream for many. But today, due to many loan programs, you can easily be a proud owner of your dream house by putting down as little as 3% of the home value. This amount that you pay upfront to buy a house is called a down payment. In addition, many mortgages provide 100% financing where you become a proud owner without paying a single penny.

Is paying a 20% down payment beneficial?

Lenders like to see a larger down payment because it signifies that the borrower is financially strong and less risky. A larger down payment also gives the lender more security if the borrower defaults on the loan. Moreover, with a larger down payment of about 20%, you need not have to pay the private mortgage insurance (PMI).

You will likely have to pay for private mortgage insurance (PMI) with a smaller down payment which adds to your monthly mortgage bill. PMI protects the lender if you default on your loan. The cost of PMI varies, but it can be as high as 1% of the loan amount. Also, with a smaller down payment, you will have to pay a higher monthly mortgage. Thus, it will take longer to build equity and gain financial security.

So if you have a significant amount of cash reserves and a low monthly income, making a higher down payment is a good idea as you will have to make a lower monthly mortgage payment. Also, with a higher down payment, you can avail of reasonable home mortgage rates in Florida. On the other hand, if you have a higher monthly income and no cash reserves, then making a lower down payment is a good idea as you can pay off your monthly mortgage and later waive off the PMI as your home equity builds up to 20%.

What is the average down payment you need to buy a house?

The short answer is: It depends.

The amount of down payment you need to buy a house depends on different mortgage loans in Florida, your savings, and your home buying goals. There are various mortgage programs available that allow you to make a smaller down payment. Down payment requirements range from 3% to 20%. First-time homebuyers can avail of different loan types and fulfill their dream of homeownership. However, each loan program has inevitable trade-offs and risks that you should know before deciding on the loan program.

1. Conventional Loans: A conventional loan is a loan that is not guaranteed or insured by the government. These loans are typically obtained through banks and credit unions. You can put as little as 3% down for a conventional loan. But a smaller down payment will make you liable to pay PMI, which will increase your monthly mortgage bill. However, the private mortgage insurance (PMI) on these loans is cancelable once you reach 20% equity in your home.

2. FHA Loans: FHA loans are backed by the Federal Housing Administration (FHA) and are available through approved FHA lenders. FHA loans are best for low-to-moderate-income borrowers. You may be eligible for an FHA loan if you have a credit score of 580 or above. The minimum down payment for an FHA loan is 3.5%. However, you will have to pay for the mortgage insurance premium (MIP), an additional cost to your monthly mortgage bill. FHA loans come with two mortgage insurance premiums. Upfront mortgage insurance premium, which is paid at the time of closing. Upfront MIP can be rolled into your monthly mortgage payment. The Annual MIP is mandatory for the life of the loan and cannot be canceled. Also, the percentage of annual MIP depends on your loan term, whether it is 15 years or 30 years. However, refinancing an FHA to other loan programs can help to avoid MIP.

3. VA Loans: VA loans are guaranteed by the Veterans Administration and are available through approved VA lenders. These loans are available to active-duty military personnel, veterans, and spouses. The minimum down payment for a VA loan is 0%. VA loan requires no MIP irrespective of the down payment you make. However, you will have to pay a funding fee, a one-time fee paid at closing. The funding fee can be rolled into your monthly mortgage payment.

4. USDA/Rural Housing Loans: USDA/Rural Housing loans are backed by the United States Department of Agriculture (USDA). These loans are available through approved USDA lenders for buying homes in suburban and rural areas. The minimum down payment for a USDA loan is 0%. However, you will have to pay an upfront guarantee and an annual fee, which can be rolled into your monthly mortgage payment.

However, down payment requirements on different mortgages may vary from lender to lender. For example, the local mortgage lenders may require a higher down payment on an FHA loan depending on the borrower’s credit score and financial background.

Conclusion

Once you make a down payment, you cannot get that money back unless and until you sell your house. So think wise. At the end of the day, making the down payment is your decision. The right amount of down payment depends on your finances, the loan program, and the home you buy.

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