Asking for advice from those who have bought a home in the past is common among potential homebuyers. However, it can often lead to many misconceptions. As a homebuyer, it is important to determine for yourself what is fact and what is fiction. Since the down payment is often one of the most misunderstood aspects of the home buying process, here’s a look at six down payment myths debunked:
Myth #1: You must put 20 percent down
This is likely the most common misconception about buying a home. While it is recommended to put 20 percent down, it isn't necessary. In fact, if you are a qualified buyer, you can get approved for a conventional loan with less than 20 percent down. However, you are stuck paying private mortgage insurance (PMI), a fee paid directly to your lender that says you won’t default on the loan.
There are additional options depending on your situation. For example, a Federal Housing Administration (FHA) loan can get you into a home for a down payment as low as 3.5 percent. Or, if you served in the military, you are likely eligible for a Veterans Affairs (VA) loan which may approve you for zero percent down.
Myth #2: Paying mortgage insurance is smarter than paying a larger down payment
Private mortgage insurance may seem like a good alternative to depleting your bank account. But, the truth is, that value can add up significantly over the long run. With a conventional loan, if you put down less than 20 percent, you will pay PMI until the principal balance reaches 78% or less of the original purchase price. Meanwhile, with an FHA loan, you will have to pay mortgage insurance for the life of the loan. When you do the math, paying more up front usually winds up being the better option.
Myth #3: Cash is king
While a cash option may seem appealing, the only benefit it provides a seller is the guarantee to close on time with no loan approval problems. Even with this benefit, a bigger offer will likely stand a better chance than an all-cash offer – especially if you have a pre-approval letter from your lender in hand.
Myth #4: Down payment assistance is easy to obtain
Down payment assistance is an option, but it is in no way easy. First off, as these assistance programs are locally run, they are usually hard to locate. On top of that, there is the fact that you have to be under a certain income level to qualify – usually somewhere around the median income in the county. If you find the right program, they may make an exception – for single parents. But, in all reality, the income qualification is a big factor.
However, if you think you may qualify, call your local housing authority office. It’s always worth a try.
Myth #5: You shouldn’t put more than 20 percent down
If you have more than 20 percent available, use it. The more money you put down, the more your interest rate will drop. But, make sure the amount you put down is feasible.
Myth #6: You can take out a loan for a down payment
In truth, you can receive help with your down payment. However, there is one caveat: it has to be a gift. Meaning, you need to have a letter from the gifters swearing they don’t plan on ever asking for the money back.
Do you have additional questions about down payments or applying for a loan? Give us a call. If we can’t answer your questions, we will pass them along to a trusted lender in the Austin area.