Just because you can make a down payment, doesn’t mean you should, right? That is why every home buyer in California should see if it makes more sense to buy a home with a low or no down payment loan program before they actually start their home search. Why? Two Primary Reasons:
- Saving for a down payment is the number one reason that prevents people from buying a home. A low down payment (1% or 3.5%) or 100% financing no down payment loan may allow you to buy a home much sooner than it takes for you to save 1% to 20% for a down payment.
- It may make more sense to keep that hard earned (gifted or borrowed) down payment money in your bank account as an emergency fund and/or allow it to grow and earn compounded interest rather than giving it to the mortgage bank to squander away.
Without a 20% down payment, you will need to pay some sort of monthly mortgage insurance…unless you use a VA or HomePath loan program.
- A down payment gives you and lender an equity position (collateral) in the property. I see this as more of a primary benefit to the lender. If you cannot make the mortgage payment and default, they can foreclose and sell your home without a loss….or actually make money! Banks tend to foreclose quicker on homes that have equity. Or, if done quickly, you can sell the home without a loss and avoid foreclosure….but still be dinged with credit late pays. Your down payment actually reduces the banks risk of loss. Do you like helping the bank reduce their risk at your expense?
- A down payment can help reduce the mortgage payment and/or paying mortgage insurance. This could be to your benefit.
- A down payment may help you qualify to purchase a higher priced home than if you purchased with no down payment.
- A down payment will give you more loan options to choose from, but not necessarily always a lower interest rate or payment….it depends on several variables.
If deciding to use a down payment when buying a home in California, how much down should you make? 1%, 3%, 3.5%, 5%, 10%, or 20% down payment????? This is where you need to rely on your mortgage broker or lender to sit down and figure out what is best for you and explain the various loan, rate and payment options available to you. If I addressed every variable in this blog post, it would be 10 pages long…..and that would be really boring.
When discussing low and no down payment options, we need to address mortgage insurance options as well. FHA and 100% financing USDA home mortgage programs both require monthly mortgage insurance. Conventional financing requires mortgage insurance with less than 20% down payment. VA no down payment and HomePath home loans are the only two mortgage programs not requiring monthly mortgage insurance.
Questions that need to be asked when considering how much (if any) of a down payment you should make.
- Should I make less of a down payment and use some of my savings to buy the rate down with discount points? Or a 20% down payment and avoid paying any mortgage insurance?
- Is all mortgage insurance evil? Is it tax deductible?
- What is the difference between lender paid and borrower paid mortgage insurance?
- What is the difference between USDA, FHA’s mortgage insurance, and Private Mortgage Insurance (PMI) when using a Conventional loan?
- How long do I plan on living in the home?
- Should I make less of a down payment and pay my own closing costs? Or larger down payment and ask the seller to pay my closing costs?
- Should I use a down payment assistance program? Do I even qualify for down payment assistance program?
- If I qualify for a down payment assistance program, how will it affect getting my offer accepted?
So, should you buy a home with a low or no down payment loan program in California? The answer can get complicated, and is different for everyone. If you have little or no down payment, the decision is less complicated but you will want to compare down payment assistance options and 100% financing options.
That is why you need a lender who will take the time to share accurate information and help you compare all your loan options….even if he can’t provide those options. But remember, no lender can do all or be everything to all people….only Superman can do that.
Fortunately, my employer is both a direct lender mortgage bank and a licensed mortgage broker (big difference). This gives me access to offer you more loan programs than 95% of the mortgage lenders out there.
Call me at (951) 215-6119, contact me, or email brad(at)homeloanartist(dot)com for more info.