Buying a home is an expensive process, notably so when you consider the down payment. If you follow the home buying recommendation of 20 percent upfront, it can make the down payment an even more difficult pill to swallow. With the average home going for $236,000 according to the National Association of Realtors, that’s a pretty hefty chunk of change.
If you’re looking to purchase a home but are feeling a little faint at the down payment price tag, don’t worry. Plenty of options are available outside the 20 percent golden rule – some of which may even be better for your particular situation anyway. Some lenders will even accept down payments as low as 3.5 percent, if you know where to look.
Steps to Secure a Loan with 3.5 Percent Down Payment
While a 20 percent down payment would make the loan approval purchase much easier, that’s not a reality for most home buyers. If you are trying to secure a loan with a down payment closer to 3.5 percent, here some steps you can take to appear more appealing to lenders:
1. Know your finances before starting your home search
Nothing is worse than finding the perfect house, then not getting mortgage approval to buy it. Don’t let this be you. Before you start house hunting, be sure to pair up with lender first – you’ll have to at some point anyway, and starting the relationship early will help you with the approval process. In many cases, your lender will be able to recommend loans or programs that don’t require a 20 percent down payment.
2. Check with your bank
If you’ve been using the same local bank for years, they may be your best bet to securing a home loan with a 3.5 percent down payment. Since you’ve been fostering a relationship and have used them for your banking, investing and saving needs, you have a better shot at being approved. Even more so if your family members use the same bank. The more established the relationship, the more willing your bank will be to go the extra mile for your loan.
3. Research your state
Most states have loan programs dedicated to helping homeowners, especially first-time buyers. Some offer lower interests rates, others offer approval at exceedingly low-down payments. It’s a good investment for the states – they want people purchasing properties and will do what they can to help them. Just be sure to do thorough research to understand the requirements for each program and if you qualify.
4. Explore other loan options
Home loans are available with only 3.5 percent down – you just may have to do a little more research to find them. Fortunately, plenty of options exists for various circumstances, so it’s best to look over them carefully and compare them to your situation in order to find the one that best works for you. Some low-down payment loan options include:
- FHA Loans
- VA Loans
- USDA Loans
- Conventional Loans
Possibly the most common low-down-payment loan, the FHA loans are backed by the Federal Housing Association. This adds security to lenders and they will usually approve for as little as 3.5 percent down. However, be aware that you will have to pay for mortgage insurance premiums (MIP’s) for the life of your loan.
If you are active-duty or honorably discharged from the military, you can secure a loan for 0% down with no private mortgage insurance (PMI).
Designed to assist low to moderate income families with purchasing homes in rural areas, the USDA loans are 0% down and generally well-regarded. However, they only apply to specific areas and require that families meet strict criteria in order to receive approval.
It may be rare, but it is possible to secure a conventional loan for 3.5 percent down. Just keep in mind that you will have to pay private mortgage insurance (PMI) – similar to the FHA’s mortgage insurance premium. Fortunately, PMI is dropped once you reach 20 percent equity in the home.
Benefits of 3.5 Percent Down Payments
Whatever loan option you decide to go with, there are upsides to a 3.5 percent down payment:
Your money may be better spent elsewhere: In some cases, it may be more prudent and result in bigger savings if you put some of your money towards resolving other debts rather than your down payment.
It keeps your cash accessible: If you have to use all of your savings in order to reach 20 percent down payment, that may put you and your family in a difficult financial situation down the road. It’s always good to have a little cushion in case life throws something unexpected your way. In this case, it may be safer to keep some of your cash tucked away in savings where you can access it for emergencies.
Sure, there are plenty of golden standard recommendations in the real estate industry and the 20 percent down payment is one of them. But every situation is different and in some cases, 3.5 percent down payments may even be better for you. Just be sure to research all of your options and come prepared for a mortgage-ready proposal.