Hey, homeowner hopeful, don’t give up on your dream if you haven’t been able to save for a down payment. Not all homebuyers can afford 20 percent down, which has traditionally been the standard and is the minimum amount required for a conventional home loan without having to pay mortgage insurance.
But the number of homebuyers who actually put 20 percent down has been shrinking in recent years, according to the National Association of Realtors (NAR). In fact, more than 70 percent of non-cash, first-time home buyers – and 54 percent of all buyers – made down payments of less than 20 percent over at least the past five years, according to NAR.1 This is also backed by First National Bank of Omaha's Mortgage and Money Survey which found that 48 percent of respondents preferred a 10 percent down payment, and 16 percent of respondents preferred a 15 percent down payment.
Why is a down payment needed in the first place? When you make a down payment you risk losing that money if you can’t make the house payments and end up in foreclosure. Thus, you have an incentive to make those monthly payments. The down payment lets the lender know you have a vested interest in making those payments.
“Buying a home is one of the biggest financial decisions most people make, but it doesn’t have to be intimidating,” says Kelley Harwood, Vice President of the Consumer Lending Group at First National Bank. “There are a variety of down payment options, and we will help you find the solution that is best for you.”
The traditional 20 percent
Twenty percent is a significant amount of money. For example, on a $200,000 home, a buyer would need to put down $40,000 to meet the down payment requirement for a conventional home loan without having to pay mortgage insurance. But not everyone has $40,000 in savings to spend on a house, especially younger homebuyers who have not had enough time to save that amount.
However, borrowers can still qualify for a conventional home loan with less than 20 percent down, but they may have to pay a higher interest rate and will be required to purchase private mortgage insurance (PMI), which are premiums that are paid monthly so that if the borrower defaults on the loan, the mortgage insurance company makes sure the lender is paid in full.
FHA homeowner loan option
Borrowers who may not be able to make a significant down payment often choose an FHA (Federal Housing Administration) loan. The loan is insured by the FHA, which protects lenders from financial risk. FHA loans require a minimum of 3.5 percent down payment, and the loan will also include a funding fee, which includes a monthly insurance premium.
VA homeowner loan option
If you are a military veteran or an active military member, you may qualify for a home loan through the Veterans Administration (VA), which do not always require a down payment. A VA home loan is one that is guaranteed by the Veterans Administration through VA-approved lenders. The guarantee means that the lender is protected against loss if the borrower fails to repay.
Another option: ‘piggyback’ loans
Some homebuyers choose to get a conventional loan with 20 percent down by getting a piggyback loan, also called an 80-10-10 loan. With this mortgage option, “a home buyer receives a first and second mortgage simultaneously, covering 90 percent of the home’s purchase price. The buyer puts just 10 percent down,” says mymortgageinsider.com.2
Here’s how it works: You get a conventional loan for 80 percent of your home’s purchase price, which is often backed by Fannie Mae or Freddie Mac. This allows you to access current mortgage rates for your home. Then you get a second loan (either a home equity loan or a home equity line of credit) for 10 percent that “piggybacks” off of that first loan. Then the homebuyer pays the remaining 10 percent of the purchase price with cash. In some cases, the use of the piggyback loan can help you avoid paying private mortgage insurance. So, in the scenario of a $200,000 home, a borrower would put 10 percent ($20,000) of his or her own money, and then get loans for 10 percent ($20,000) and 80 percent ($160,000) simultaneously.
While a piggyback loan could help you avoid private mortgage insurance, it may cause you to pay more in the long run anyway. Your best bet? Talk to a mortgage advisor – they can help you sort your situation out.
Using IRA funds for a down payment
For first-time homebuyers, another option to make a down payment on a home is to withdraw from an IRA account and avoid early withdrawal penalties. Bankrate.com says that “Tax laws allow you to withdraw up to $10,000 in IRA funds to buy your first home. If you’re married and you’re both first-time buyers, you each can pull from your retirement accounts, meaning a potential $20,000 down payment.”3
Find a mortgage partner
With all of these options available for homebuyers, you can see why having a mortgage professional in your corner is so important.
“By working with a First National mortgage expert, you’ll find answers to every question and gain confidence during every step of the process,” says First National Bank’s Harwood. “When you’re making an investment such as buying a home, it’s important to know all your options, and we’ll help you find the one that works best for you.”
Got questions? The mortgage loan experts at First National Bank love explaining home loans. (Seriously – when they played house as kids, they were the bankers.)
1 “The 20% Mortgage Payment is All But Dead” – http://www.latimes.com/business/la-fi-mortgage-down-payment-20170629-htmlstory.html
2 “Piggyback 80 10 10 Loans Will Save You Money in 2018” – https://mymortgageinsider.com/80-10-10-piggyback-mortgage/
3 “When you can tap your IRA and avoid a tax penalty” – https://www.bankrate.com/finance/taxes/when-ok-to-tap-ira-1.aspx