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‘Down’ Hurdle

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Posted On: 01/10/2018

Question: I can buy a car with little or even nothing down but to buy a house I need 20 percent up front. This makes no sense, especially since a home is such a larger financial commitment. How do I get around the down payment hurdle?

Answer: Buyers that believe the 20 percent myth miss the opportunity to buy now, a time when mortgages are near historic lows. Qualified purchasers can buy today through the VA (0 down), the FHA, (3.5 percent) and with such 3-percent programs as Freddie Mac’s Home Possible Advantage and Fannie Mae’s HomeReady.

Equally important, the definition of a “down payment” is somewhat fuzzy. You might need 3.5 percent down for FHA financing but maybe family and friends can help out with a gift. Also, there are more than 2,000 down payment assistance programs across the country according to DownPaymentResource.com, a site where you can search by location for programs in your area. Such assistance programs can be used to reduce or even eliminate down payment costs.

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It’s worth looking into down payment assistance programs because they’re widely available. While some programs are restricted on the basis of income, location (buying only within certain areas) or status (programs only for first-time borrowers as an example) many are open to buyers in general.

Weirdly, sellers often buy into the 20-percent down myth and, as a result, reduce competition for their properties. They sometimes see offers with more down as somehow stronger than offers with little up front when in fact it makes no difference to them. For example:

Smith buys the Johnson house for $200,000 with 20 percent ($40,000) down and gets $160,000 in financing.

Jones buys the Vacaro house for $200,000 with 3.5 percent ($7,000) down and obtains a $193,000 mortgage.

At closing both Johnson and Vacaro get $200,000 from their buyers. Both are paying $200,000. Neither offer is “stronger” than the other.

Where a big down payment becomes important is when one looks at the cost of mortgage insurance.

Buy with less than 20 percent down and lenders will want some form of mortgage insurance to protect them against loss – protection in the form of an FHA-backed mortgage, VA financing or a conforming loan backed with private mortgage insurance.

There is a cost to such coverage and the result is a higher monthly ownership expense for buyers with little down. The VA has an upfront mortgage insurance cost (called a “funding fee”) but no annual fee. The FHA has both up-front and annual mortgage insurance premiums (MIPs) while fee arrangements for private insurance programs vary. For details speak with loan officers and ask about the total monthly cost for any loan you are considering.

Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.

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