Do I Need a Down Payment to Buy a House?

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Do you need a down payment to buy a house? After all, it can be difficult to save up thousands of dollars to qualify for a mortgage.

The good news is the answer is yes- there are a few options to let you buy a house without a down payment. But even though the options exist, you may not qualify or decide not to consider this route. Let’s start with why.

Why You Should Consider Saving Up for a Down Payment

There are two main advantages of saving up for a down payment. The first is your monthly payments will be lower. For example, let’s say you want to buy a house that costs $250,000. If you take out a mortgage for that amount with zero down payment, your monthly payment would be roughly $1,086.64* (excluding monthly property tax and insurance payments)

If you are able to put down $50,000 upfront, your mortgage will only be $200,000. This drops your monthly payment to $881.49* (excluding monthly property tax and insurance payments), a savings of $205.15 per month.

You can use that extra money to do several things:

  • Put into retirement savings and get a higher ROI
  • Pay down the principle of the house faster
  • Save as an emergency fund
  • Allocate to a house maintenance fund

You have a lot of options.

The second advantage to a down payment is you won’t have Private Mortgage Insurance, also called PMI. Not all types of mortgages include PMI, but most do. PMI is an extra fee you need to pay if you don’t own at least 20% of the home’s value. So if you buy a home without a down payment, you will pay an extra 0.5% – 1.5% of the home’s value every year. That means your $250,000 home will cost an extra $1,250 to $3,750 per year.

*On a VA 30-Year fixed rate purchase with loan amount $250,000 (at 100% LTV with zero down payment from borrower), at an interest rate 3.24% with $0 discount points (Annual percentage rate – 3.3196%), you will be required to make 360 equal monthly payment of $1,086.64 (which includes principal and interest only, so your actual payment will be higher).

Types of Mortgages That Don’t Need a Down Payment

If you’re fortunate enough to qualify for two types of loans, you won’t need any kind of down payment. Those two loans are USDA Loans and VA Loans.

USDA loans are only available in specific rural areas. The program was designed to help members of the community be able to afford a home. VA loans are only available to military members and military veterans.

Don’t qualify for those? That’s okay, as you have some other good options available.

Mortgages with Low Down Payment Requirements

The most common type of mortgage, called a conventional loan, may be an option for you. Depending on your credit score, you might qualify for a conventional loan up to 97% of the mortgage. That means you only have to have a cash of 3% of the purchase price. The $250,000 home we referenced earlier would require at least $7,500** down.

Another option is an FHA loan. If you qualify for an FHA loan, you may be able to get the house with 96.5% financing with just 3.5% cash requirement. That puts your required down payment on a $250,000 house at $8,750**.

While it may take some time to save up those down payments, at least you don’t need to save up 20% of the purchase price!

**On a FHA 30-Year fixed rate purchase with loan amount $250,282 (at 96.5% LTV with 3.5% down payment from borrower), at an interest rate 4.862% with $0 discount points (Annual percentage rate – 5.8730%), you will be required to make 360 equal monthly payment of $1,322.54 (which includes principal and interest only, so your actual payment will be higher).

Conclusion

Do you need a down payment to buy a house? Not always, it depends. If you’re able to qualify for a VA Loan or USDA Loan, you don’t need a down payment. But if you’ll need to get a conventional loan or FHA loan, a down payment will be required. If you need help saving up the down payment or have any questions, give us a call at (562) 924-7884. We’ll help any way we can.

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