Just because you can make a down payment, doesn’t mean you should. That is why every home buyer in California should analyze whether 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 with 0% to 3.5% down payment may allow you to buy a home much sooner than it takes for you to save.
- It may make more sense to keep that hard earned (gifted or borrowed) down payment money in an investment account earning money or as an emergency fund.
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.
The Purpose for a Down Payment & Who benefits
- 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.
Do Low Down Payment Increase Odds of Foreclosure?
There is a myth that buyers who use low down payment mortgage programs have a higher chance of foreclosure. Ken Harney of Keeping Current Matters shared some new data from the Urban Institute that shows buyers who put 3.5% down have less than 1% greater chance of defaulting as buyers who 5-20% down.
So no, low down payments do not significantly increase the chances a borrower will default.
How Much Down Payment Should I Put Down?
Should I or Can I only put down 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 private 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 to Ask About Down Payments & PMI
- 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.
Call me at (951) 215-6119 or contact me for more info.
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