Down Payment – How much is appropriate
It use to be that if you wanted to buy a home, you would have had to pay for the entire purchase price in cash. As you can imagine, the rates of home ownership in those days were very low. Starting with the housing boom of the post WWII era, buyers began to have great opportunities to secure financing, which made the dream of home ownership possible for millions of home buyers. Even during those days, however, a home buyer was expected to make a 20% down payment in order to qualify for a home loan.
Without question, times have changed. In fact, just a few years ago, it was rather easy to get loans for MORE than the purchase price of a home. In other words, if you were buying a $100,000 home, it wasn’t hard to get a loan for $105,000! Many buyers took advantage of this, and pocketed the extra $5,000, or used it to make home improvements and buy furniture. As we all know, these types of loans got some home buyers into trouble. As the housing market declined in California, Ohio, Arizona, Michigan, Nevada, Florida and elsewhere, some of these buyers found themselves in a position where their home was worth less than what they owed on their loan. For example, some home owners owned a house that was worth $90,000, but they had a loan balance of $105,000. Obviously, this is a bad situation to be in, because those homeowners couldn’t sell their homes and pay off the loan balance!
What does this mean to you?
Because of the mortgage meltdown, Congress and the lending institutions have revamped their loan guidelines. First off, lenders still agree that a 20% down payment is best. At 20%, you can qualify for every perk, in regards to loan terms. That being said, most people can’t come anywhere close to 20%.
Conventional Loans
In recent years, “conventional” loans were the loan of choice for most home buyers. Basically, conventional loans in the past few years required a good credit score, and little else. Buyers could qualfy for exceptional rates, and make little or no down payments (see the above examples). Conventional loans have been tightened significantly. The qualification process is much more stringent, and in many cases, it’s very difficult to qualify without making at least a 10% down payment.
FHA Loans
Because most people cannot make a 20% or even a 10% down payment, we are seeing a huge resurgence in FHA loans, which are government-insured loans. FHA loans are the primary loan source for first time home buyers, as they are easy to obtain, have low interest rates, and only require a moderate credit score. To qualify for an FHA loan, you have to make at least a 3.5% down payment (ARTICLE UPDATE! - There are now some governement down payment assistance programs!). This down-payment has to either come from you or be a gift from a family member. This money CANNOT come from the seller, although the seller may pay any additional closing costs that you incur. Most first time home buyers utilize FHA loans, and they are a fantastic option for most individuals.
VA & USDA loans
There are two current major loan programs that still allow a buyer to qualify for a 0% down payment. VA loans, which require that you be a U.S. military veteran were created to help service men & women more easily qualify for a home loan. USDA loans were created to stimulate housing in rural areas. Don’t be misled by the term “rural,” as it has a very loose meaning. In fact, quite a few suburbs in the Austin area qualify as “rural,” although the loan program certainly is limited to only these areas.
In summary, the minimum down payments for the major types of home loan programs are:
VA & USDA Loans - 0%
FHA Loans - 3.5% (The most common loan program for first time home buyers)
Conventional Loans - 10% (In most cases)