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- down payment strategies
Many lenders require a 20% down payment on your home in order to avoid mortgage insurance and qualify for their best rates on a traditional loan. However, it is possible to buy a home with less than 20% down.
Private mortgage insurance
If you are making a down payment of less than 20%, many lenders will request that you obtain private mortgage insurance (PMI), which helps cover the cost of your mortgage payments should you default on your loan. PMI costs will likely result in a slight increase in your overall monthly payment, but can be a useful strategy for buying a house with a lower down payment.
Home equity loans
If you are interested in avoiding PMI, a lender may be able to offer a second loan, also known as a "home equity loan", that you can use toward your down payment. A home equity loan is a second mortgage on your house and typically accrues interest at a higher rate than your primary mortgage. For example, let's say you want to purchase a house with 10% down and need to finance the remaining 90% of the purchase price. A lender could potentially offer you a primary mortgage that would cover 80% of the purchase, and a secondary mortgage that would cover 10% of the purchase price. Your down payment would cover the final 10%. This type of loan arrangement is often called an "80/10/10" solution.
Down payment assistance programs
Today, there are a wide variety of nonprofit organizations and programs that seek to help lower income families cover the costs of a down payment. In some cases, you may also be able to get help with closing costs and other up-front cash requirements.
Family assistance
Many first-time homebuyers receive assistance with their down payments from a parent or family member in the form of a monetary gift. While this isn't always an option, you may want to consider discussing your home-buying intentions with family members to explore every possible avenue for coming up with your down payment. Your lender can help you determine which down payment strategy or combination of strategies may make the most sense for your financial situation.
Homebuying?
Refinancing?
If you are receiving assistance from a family member, your lender may ask for a "letter of commitment" from the family member.
