What is the Down Payment?
A down payment is a portion of available money given at the outset of a loan to demonstrate commitment to the purchase. You are confusing the amount of cash you put into the transaction with the down payment. The down payment is smaller because of settlement costs.
For most first-time home buyers, saving enough money for a down payment is a major hurdle to owning a little piece of paradise. Traditionally, lenders have preferred a down payment of at least 20% of the home's purchase price. However, lenders will almost always accept less than that if the borrower takes out private mortgage insurance. In the last few years, innovative programs have made it possible to put down anywhere from 0% to 3% of the value of a home and still qualify for a mortgage.
How Much Should You Put Down?
If you've got the money, there are advantages to putting 20% down. For one thing, you immediately have substantial equity in your home. This may be important to you psychologically, and that counts. In addition, you'll avoid having to pay private mortgage insurance.
If you haven't got the money, then you'll want to learn a little more about the private mortgage insurance mentioned above.
Private Mortgage Insurance (PMI) :-
Private mortgage insurance protects a lender in the event that you default on the loan. Lenders generally require mortgage insurance on loans with low down payments because experience shows that a borrower with less than 20% invested in a house is more likely to default on a mortgage. You're a Fool and you're not going to do this, we know. But they don't know it yet.
The 3 primary investors in home loans are
- Federal National Mortgage Association (Fannie Mae),
- Federal Home Loan Mortgage Corporation (Freddie Mac) and
- Government National Mortgage Association (Ginnie Mae).
By purchasing and selling residential mortgages, Fannie Mae and Freddie Mac help keep money available for homes across the country. Unlike Fannie Mae and Freddie Mac, Ginnie Mae does not actually buy mortgages. It adds the guarantee of the full faith and credit of the U.S. Government to mortgage securities issued by mortgage companies.
The Two Choices :-
- Government Insurance and
- Private Insurance
Basic kinds of mortgage insurance :-
Low down payment mortgages can be insured in two ways, through the government or through the private sector. Mortgages backed by the government are insured by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) or the Farmers Home Administration (FmHA).
Although anyone can apply for FHA insurance, the other two government mortgage guarantee programs are much more targeted.
- The VA program is limited to qualified, eligible veterans and reservists. This program is very specialized, so contact your mortgage professional for the details.
- The FmHA insures loans for the construction and purchase of homes in rural communities.
Obtaining conventional financing is the alternative to obtaining a home loan backed by the government. Conventional mortgages are all home loans not guaranteed by the government, including those guaranteed by private mortgage insurers.
Although government and private insurance are based on the same concept of allowing families to get into homes with less cash down, there are many differences between the two. Often, your mortgage professional will play an important role in suggesting and deciding which insurance is selected.
Home buyers must make a down payment of at least 5% of a home's value to be considered for private mortgage insurance. However, under some special programs, the down payment requirement allows the buyer to use a gift or grant to cover 2% of the 5% down payment required by private mortgage insurers. The gift or grant may come from a friend, relative, community group or other organization.
Private mortgage insurance is available on a wide variety of home loans and there is no preset limit on the loan amount. Although differences such as these may affect whether the mortgage company prefers to work with government or conventional mortgages.
With the wide variety of loans available, home buyers have the freedom to choose the type of loan that best suits their needs. Early on in the home buying process, it is a good idea to meet with several companies to compare the types of mortgages they offer and shop for the best price and terms. Best of all, working with a mortgage insurer can be very easy, whether your loan is insured by the FHA or a private mortgage insurance company, because your mortgage professional handles all of the arrangements.
By making lending money to home buyers safer, mortgage insurance helps more families get into homes of their own.
NOTE :- Some lenders may have fancy ways to allow you to avoid PMI while still putting down less than 20%. For example, they might offer you a second-tier mortgage to make up the difference. The interest on the second loan will be higher, but it will be tax deductible, whereas PMI is not. As always, it pays to do your homework and explore as many options as you can with your lender.