When it comes to qualifying for a mortgage, which is noted as the biggest barrier to entry? Credit score, job security, or down payment? The survey says? Down payment. According to the Zillow Housing Aspirations Report (ZHAR), a semi-annual survey of 10,000 people, saving for a sufficient down payment was the biggest obstacle for renters looking to transition into home ownership. About 70 percent of those surveyed had this opinion.
This got me thinking (which is dangerous) whether this opinion was based on fact or perception. Chances are very good that the majority of those surveyed don’t know the actual down payment requirements for home ownership. It’s also possible that some of those surveyed may refuse to buy a house until a specific equity percentage is saved up. Regardless of if either or both reasons are in play, it provides a good opportunity to review the topic.
Here is a review of some low down payment options:
FHA loans – allows borrowers to put down 3.5 percent on home purchases
Conventional loans – allows credit-worthy borrowers to put down as little as 1 to 3 percent.
Fannie Mae 97% – allows credit-worthy borrowers to put down 3 percent on home purchases
Freddie Mac’s Home Possible – allows credit-worthy borrowers to put 3 to 5 percent down with reduced mortgage insurance on homes which meet certain criteria.
Fannie Mae’s HomeReady – this is basically Fannie Mae’s version of the Freddie Mac Home Possible loan.
Let’s visualize this using the Fannie Mae 97% program. If a buyer is at a price point of $190,000 for their home purchase, the required down payment of 3 percent is $5,700. While that’s not pocket change, it may be eye opening for potential homebuyers who thought they needed 10, 15 or 20 percent saved up to use as a down payment.
It can be challenging to create a monthly budget that allows you to save up for a down payment. This is even more true if you are renting, considering it is more expensive than owning a house in normal years as rents continue to increase.
Remember, saving for home ownership isn’t a sprint. Take some time to create a strategy and build up a good base. If your lease is coming up in a few months, consider talking to your landlord about doing a shorter extension, such as a three or six-month instead of a new 12-month lease. My suggestion is to educate yourself first on a payment target, which will help you land at a target price range. From there you can do the math to calculate the required down payment amount. Once you have these two pieces of information you can create your savings goal.
If you’d like to run through your specific scenario, timeframe, and purchase goals, give Fountain Mortgage a call. We’re always happy to crunch the numbers for you.