What works best for your situation?
The 20% Downpayment
The 20% is generally considered the best type of loan to secure since it typically has a lower mortgage rate, fewer fees, and a safe margin of equity. If you have the bandwidth to bring 20% or more to the table, this is a great option. On the flip side, waiting to afford a 20% downpayment may have other costs such as rising rents, home prices, and mortgage rates. These trends may push homeownership significantly further into the future. It is, however, a frequent misconception that a 20% downpayment is required to purchase a home. According to the National Association of Realtors®, the median downpayment among first-time buyers has been 6% since 2014.
Low Downpayment Loan Options
In lieu of saving 20% for a downpayment, many options may be used to purchase a home sooner with less up-front capital. How long would it take you to save 3%, 5%, 10%, or 20%?
Loans with Private Mortgage Insurance
In general, loans with less than 20% equity, will require mortgage insurance. The insurance is used to protect the lender in the event you default on your loan. With a loan backed by private mortgage insurance, you can purchase a home with a downpayment for as low as 3%. Payments may automatically cancel when your mortgage balance reaches 78% of the home's original value. Some lenders will allow cancellation with an 80% balance. Private mortgage insurance premiums may also be tax-deductible. (Consult your tax advisor)
FHA Insured Loans
With an FHA insured loan, you can purchase a home with a downpayment as low as 3.5% through a government program backed by taxpayers dollars. The program offers only one payment option – an upfront fee, due at closing, and a monthly fee. It’s important to note that the FHA does not allow buyers to cancel the premium payments, meaning a buyer must make the payments for the life of the loan. FHA premiums may also be tax-deductible. (Consult your tax advisor)
Loans for Veterans
VA loans provide a benefit by offering a long term financing option to American veterans. These programs are government-insured loans and offer various downpayment options. If you are eligible, Your lender can share more specific information. You may also learn more at the US Department of Veterans Affairs.
There are many downpayment assistance programs. These programs can assist by giving favorable terms for second mortgages, grants, or gifts, but they can add steps to the home buying process.
A bridge loan makes it possible to finance a new house before selling your current home. Bridge loans may give you an edge in a tight housing market — if you can afford them. There are clear benefits to a bridge loan, but they also come with some additional risk and expense.
- You can make an offer on the house you want without a "sale contingency."
- Payments may be interest-only or deferred until you sell.
- Usually, they have higher interest rates. You may also have a variable prime rate that increases over time.
- You may have to pay for an appraisal along with closing costs and fees.
- You may own two houses — with two mortgage payments.
- You’re limited to 80% LTV, which requires more than 20% equity to yield enough money for the house you want.
Construction loans usually are a short-term loan intended to cover the cost of building a home. One key difference from a traditional mortgage is how the money is paid out. Rather than lending the entire balance of the loan at one time, a construction loan pays a series “draws” as needed.
A construction loan can be used to build a home or construct a house on land you already own. Typically, you make interest-only payments on the balance of the money you’ve drawn. The loan is designed to pay the contractors and subcontractors as work is completed.
Typically, when the home is completed, the construction loan gets paid off or converted into a traditional permanent mortgage. Payments of principal and interest are due until the loan is satisfied off or you sell the home.
In general, an FHA 203(k) loan allows you to wrap your renovation costs into your mortgage—that's just one loan and one closing. The amount you borrow is a combination of the price of the home and the estimated price of the repairs, including labor and materials. Your down payment will be based on the full loan amount, and your monthly payments will be higher since you're lumping the repair costs in the same loan.
There are two types of 203(k) loans:
Both loan programs require the repairs to start within 30 days of the loan closing and to be completed within six months.
The FHA has specific guidelines about types of projects you can finance with a 203(k) loan, but generally, the only home improvements that you can't finance are luxury items like a swimming pool.
* These loan options are generalized for illustrative purposes and your lender will provide specific terms, conditions, and rates for any specific loan.
**Many loan programs and conditions evolve, always consult a licensed lender or tax professional as applicable.