Five Star Mortgages

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Low Down Payment

Are you trying to purchase the home of your dreams, but you have very little money to put down? If so, you might think that it is impossible for you to make a home purchase, but this is not true! In fact, it is possible to purchase a home with a very small down payment.

Understanding Down Payments

When you purchase a home, lenders will require a down payment be paid on the home. In most cases, lenders expect you to pay 20% down on the cost of the home. Therefore, if the home costs $100,000, you would be expected to make a $20,000 down payment.

Of course, many people that are just starting out do not have that kind of money to spend on a down payment. Therefore, lenders will work out a low down payment plan that still allows them to purchase the home without coming up with 20% of the home's price. When this happens, lending institutions require the buyer to also pay Private Mortgage Insurance, or PMI.

Understanding PMI

Lending institutions require PMI from their borrowers because it helps provide them with extra protection if the borrower defaults on the loan. Although PMI insurance protects the lender, the borrower is expected to pay the expense of carrying the insurance. Depending upon the amount of your loan and your credit, PMI insurance can potentially add hundreds of dollars to your house payment each month.

Understanding Low Down Payment Mortgages

If you do not have 20% of the house price to pay toward a down payment, you will have to apply for a low down payment mortgage. If you can't afford more than 5% of the asking price, you can apply for one of these loans. In some cases, you may even be able to pay as little as 3% of the asking price and borrow the rest.

In order to qualify for a low down payment mortgage, you need to meet certain qualifications. These include:

  • Your income needs to be high enough to cover the monthly house payment as well as the insurance payment
  • You need to have available cash for paying the 3% down payment as well as the closing costs
  • The appraised value of the home needs to be high enough to ensure you are not borrowing more than the home is worth
  • You need to have a good credit score
  • You need to have enough money to cover the first mortgage payment

Of course, you will have to pay PMI if you are only making a 3% down payment. In addition to this extra expense, you also need to be prepared to pay loan application fees, homeowner's insurance, Realtor commissions, and legal fees.

Many lenders have additional criteria that must be met before they will approve a low down payment mortgage loan. These may include:

  • A home inspection must be completed and passed
  • You must carry flood insurance if the home is in a flood zone
  • The plumbing and electrical systems must be up to code
  • The heating system must be in very good condition

Even if you aren't required to get a home inspection, it is always a good idea because it will help give you a better idea of the condition of the home.

If your income is low enough and you meet other qualification terms, you might also look into getting a VA loan or an FHA loan if you do not have much to put down on the home. Another option is the piggyback loan. With this type of loan, you borrow 80% of the cost and then borrow against the equity in the home in order to come up with the remaining 20%. This will allow you to avoid paying PMI, though you will need to make two loan payments.

To explore your options and to learn more about the types of low down payment mortgages available, contact one of our professionals at FiveStarHomeMortgage. We will be glad to help!