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Demystifying the mortgage down payment

The down payment is the portion of your home's purchase price that is paid upfront by you at closing.

Whether you're getting your loan from a bank or a non-bank mortgage company, lenders will look at this down payment amount as your equity investment in the home, and that amount plays a vital role in determining not only how much you'll need to borrower, but also:

So, do you absolutely need to have a large down payment to buy a home? No.

There is a lot of confusion about the minimum down payment needed to buy a home. As a homebuyer, you should know that there are options available to you to purchase a home with low down payment.

Additionally, you should be aware of the potential consequences of having a low down payment, and we'll highlight them below:

Private mortgage insurance (PMI)

For conventional financing, if your down payment is low, your “loan-to-value ratio” will be higher. In that case, your lender may require you to pay private mortgage insurance, because they are lending you more money to purchase the home and increasing their potential risk of loss if the loan should go into default.

With PMI, a homebuyer can put a low down payment and still qualify for a conventional mortgage loan. But a homebuyer will have to make larger monthly mortgage payments (since they’ll have to pay PMI).

As a prospective homebuyer, it is essential that you think about your lender’s requirements and what a higher or a lower down payment will mean for your monthly cashflow and your ability to repay the loan.

Ultimately, you have to determine if it is worth it to pay PMI each month in order to receive the other benefits of homeownership vs. saving for a larger down payment and avoiding PMI, even if that means waiting longer to buy a home?

Programs that allow for low down payment

Freddie Mac has long allowed for low down payment options, and their Home PossibleSM mortgage is available to qualified borrowers with even lower down payment, which can even be raised by a gift from a family member or employer or a grant from a government agency.

Fannie Mae announced the “HomeReady” Buyer program, under which qualifying first-time homebuyers can have low down payments.

To receive the low down payment program, homebuyers typically complete an online homebuyer education course.

Fannie Mae said that it is partnering with Framework, a nonprofit created by the Housing Partnership Network and the Minnesota Homeownership Center, to create an online homebuyer education course.

As a prospective homebuyer, it is essential that you think about your lender’s requirements and what a higher or a lower down payment will mean for your monthly cashflow and your ability to repay the loan. Ultimately, you have to… Click To Tweet

Down Payment Assistance Programs

Down Payment Assistance Programs can be run by your direct lender, a non-profit organization, or local and state housing authorities where you live. As a NeighborWorks Housing Survey showed: “Most of U.S. Adults are unaware of down payment assistance programs available for homebuyers,” and that's why our Stem Lending Blog is helping to make you aware. These programs are an important tool you may be able to leverage towards homeownership, provided you qualify.

The three main types of down payment assistance are grants, second mortgage loans, and tax credits.

Grants – Grants are funds that you do not have to pay back as long as you own and occupy your home for a certain period of time.

Second mortgage loans – The most common down payment source, many second mortgage loans offered by state and local governments have low or zero interest rates, and the payments are deferred over a specified time span and, in many cases, the loan is completely forgiven over time.

Tax credits – Certain states and local governments, including housing finance agencies, issue mortgage credit certificates, which reduce the amount of federal income tax you pay. This makes more money available upfront for your down payment or closing costs.

The U.S. Department of Housing and Urban Development (HUD) provides grants to state and local organizations through the HOME Investment Partnerships Program and the Community Development Block Grant Program.

To find the programs in your state, go to HUD's on-line listing.

Stem Lending's partner mortgage lenders have down payment assistance programs designed to provide down payment assistance to a wide variety of eligible borrowers. Contact us to learn more about them, call: (833) 600-0490.

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