A U.S. Veteran’s Affairs (VA) loan offers military members and veterans home loans with zero money down approvals. The U.S. Department of Agriculture (USDA) also has a zero-down loan guarantee program for specific rural areas.
In 2016, the average home down payment was 11% according to the National Association of Realtors. Home buyers age 35 and under on average put down 8% in the same time period. When you are figuring out how much to save for a down payment, know that, while you are not allowed to borrow the money for the down payment, it’s perfectly acceptable to use any cash gifts from friends, family, or business partners. Setting aside any workplace bonuses or financial windfalls (like an inheritance) can also curb the impact of having to save. Many young people (including myself) got help with the down payment on their frst house by their parents, grandparents, or other relatives; there is no need to be prideful about it. Accept with gratitude any help you get, and be sure to send them a thank you letter.
If you take out a traditional mortgage and do not make a 20% down payment, your financial institution will likely make you purchase Private Mortgage Insurance (PMI). PMI is arranged by the lender and provided by private insurance companies to insure the financial institution against loss of money if they foreclose on your house and sell it. A buyer usually would be required to put down 20%, and the financial institution would put a mortgage of 80% of the purchase price. If the buyer defaults, and the lender forecloses on the home, the lender only has to sell the house for 80% of what you paid for it to be made whole on its mortgage. The 20% down payment gives the lender a cushion to recover its loan, even if home values have declined since the borrower bought the house.
If the buyer puts down less than 20%, this means that the lender’s Loan-to-Value ratio (the percent of the purchase price the lender finances) is higher than 80%. This increases the risk that the financial institution will not recover its loan if the buyer defaults. PMI essentially insures the recovery of the difference between a 5% down payment and a 20% down payment. Let’s say you buy a home for $300,000. Whereas people used to put down 20% ($60,000.00), you only put down 5% ($15,000.00). The lender is now financing 95% of the purchase price ($ 285,000.00). In order to cover the increased loan exposure, the lender will arrange for PMI and make you pay for this insurance. It costs somewhere between 0.5% and 1% of the total outstanding mortgage. For the example above, a 0.5% premium of the PMI on a mortgage of $285,000 would cost you $1,425.00 per year, or an additional monthly payment of $119.00.
You should buy a home as soon as you have at least a 5% down payment and go ahead and pay the PMI premium. It is hard enough to save money for a down payment (or ask your parents for the down payment) when you are beginning your career. In addition to that, the Consumer Financial Protection Bureau states that when the amount outstanding on your mortgage becomes 78% or less of the value of your home, then by law, your lender must cancel the PMI (and you stop paying the premium). In practice, you can often get your lender to remove the PMI when your mortgage is 80% or less of the home’s value. In both cases, you want to alert your lender of the Loan-to-Value and ask that the PMI be canceled. The lender will likely not do it automatically.
Qualifying to remove the PMI happens reasonably quick because your home value will appreciate at least 3% per year. Your lender will not pay attention to the home values in your area so will not volunteer to remove your PMI. You have to ask your lender to do it. Stay informed about the property values of comparable homes in your neighborhood. The bank may ask you to pay for another appraisal ($300 to $500) but it is worth the money to save the PMI premium each month.