As a result, consumers today are no longer required to put 20% down for a house — in fact, some mortgage lenders actually allow down payments as low as 3%. For example, the DreaMaker℠ loan from Chase Bank lets homebuyers put down just 3% of the home's price, as does the HomeReady loan from Ally Bank.
Typically, mortgage lenders want you to put 20 percent down on a home purchase because it lowers their lending risk. It's also a “rule” that most programs charge mortgage insurance if you put less than 20 percent down (though some loans avoid this). But it's NOT a rule that you must put 20 percent down.
What happens if you can't put down 20%? If your down payment is less than 20% and you have a conventional loan, your lender will require private mortgage insurance (PMI), an added insurance policy that protects the lender if you can't pay your mortgage.
There are four major types of mortgages and none of them require 20% down or even close to it. Nearly all home buyers in today's market opt for VA, USDA, FHA, or conventional financing. These are widely available programs available at virtually every lender.
You can avoid PMI without 20 percent down if you opt for lender-paid PMI. However, you'll end up with a higher mortgage rate for the life of the loan. That's why some borrowers prefer the piggyback method: Using a second mortgage loan to finance part of the 20 percent down payment needed to avoid PMI.
Before buying a home, you should ideally save enough money for a 20% down payment. If you can't, it's a safe bet that your lender will force you to secure private mortgage insurance (PMI) prior to signing off on the loan, if you're taking out a conventional mortgage.
If you make $3,000 a month ($36,000 a year), your DTI with an FHA loan should be no more than $1,290 ($3,000 x 0.43) — which means you can afford a house with a monthly payment that is no more than $900 ($3,000 x 0.31). FHA loans typically allow for a lower down payment and credit score if certain requirements are met.
The traditional way to avoid paying PMI on a mortgage is to take out a piggyback loan. In that event, if you can only put up 5 percent down for your mortgage, you take out a second "piggyback" mortgage for 15 percent of the loan balance, and combine them for your 20 percent down payment.
An offer with a higher down payment will be more attractive to the seller and may help you outbid your competition. Price matters, of course, but it's not everything. Sellers also have to take into consideration the likelihood of the deal closing.
Mortgage amount: $200,000 — This example assumes you have no other debts or monthly obligations beyond your new housing costs, a 20% down payment, and a good credit score. With that down payment, your $200,000 mortgage would buy you a home worth $250,000. Salary: $94,000 per year.
“You can change the amount of your down payment after the offer has been accepted on a home but will need to confirm with your lender and Realtor before making such changes,” says Shelby McDaniels, channel director for Corporate Home Lending at Chase.
A larger down payment means starting out with a smaller loan balance, which has a few advantages. One of these is that it creates a cushion to preserve equity in your home even if market values decline. That could make the difference in being able to refinance or sell your home in the years ahead.
The more money you put down, the better. Your monthly mortgage payment will be lower because you're financing less of the home's purchase price, and you can possibly get a lower mortgage rate.
You have the right to request that your servicer cancel PMI when you have reached the date when the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home. This date should have been given to you in writing on a PMI disclosure form when you received your mortgage.
If you weren't able to put down 20% when you purchased the property, you can have PMI waived once you've built up enough equity over time. But your lender isn't going to automatically cancel your PMI premium once you've reached 80% LTV. You'll have to reach out and request it.
Mortgage insurance is required on most loans when borrowers put down less than 20 percent. All FHA loans require the borrower to pay two mortgage insurance premiums: Upfront mortgage insurance premium: 1.75 percent of the loan amount, paid when the borrower gets the loan.
For the couple making $80,000 per year, the Rule of 28 limits their monthly mortgage payments to $1,866. Ideally, you have a down payment of at least 10%, and up to 20%, of your future home's purchase price. Add that amount to your maximum mortgage amount, and you have a good idea of the most you can spend on a home.
While buyers may still need to pay down debt, save up cash and qualify for a mortgage, the bottom line is that buying a home on a middle-class salary is still possible — in some places. Below, check out 15 cities where you can become a homeowner while earning $40,000 a year or less.
Putting 20% down may also be a bad idea if you don't plan to own the home long. For one, it lowers your rate of return once you sell. On top of this, it puts more of your money at risk should your home's value drop.
When attempting to determine how much mortgage you can afford, a general guideline is to multiply your income by at least 2.5 or 3 to get an idea of the maximum housing price you can afford. If you earn approximately $100,000, the maximum price you would be able to afford would be roughly $300,000.
While the amount you pay for PMI can vary, you can expect to pay approximately between $30 and $70 per month for every $100,000 borrowed.
In this scenario, an extra principal payment of $100 per month can shorten your mortgage term by nearly 5 years, saving over $25,000 in interest payments. If you're able to make $200 in extra principal payments each month, you could shorten your mortgage term by eight years and save over $43,000 in interest.
You decide to make an additional $300 payment toward principal every month to pay off your home faster. By adding $300 to your monthly payment, you'll save just over $64,000 in interest and pay off your home over 11 years sooner.