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by Maurie Backman | Updated July 19, 2021 - First published on Jan. 13, 2021
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Want to buy but lack the funds? Here are your choices.
Today's mortgage rates are remarkably low, which may have spurred your desire to buy a home. But what if you haven't yet been able to save much for a down payment?
It is possible to get approved for a mortgage without coming up with 20% of your home's purchase price. However, doing so will leave you on the hook for private mortgage insurance, or PMI. PMI is a premium that's generally tacked onto your monthly mortgage payment to protect the lender in case you fall behind with your payments.
PMI can amount to up to 1% of your loan each year. Let's say you take out a $300,000 mortgage without a 20% down payment. You could wind up paying an additional $3,000 a year, or $250 a month, until your loan balance falls to 80% of your home's value. That's a lot of extra money to give up.
But even if you're willing to pay PMI, a lender still may not approve you for a home loan if you're short the funds for a 20% down payment. If that's the case, there are other options you can consider. Here are three worth looking at.
With an FHA loan, you can buy a home with as little as 3.5% down. However, you'll still pay an up-front premium of 1.75% of your loan amount, as well as an ongoing monthly premium that will vary based on your loan amount and its terms. If your goal is to avoid paying PMI, an FHA loan won't really work, because you'll be charged an FHA-specific premium instead. The difference, however, is that FHA lenders will approve you with a lower down payment, whereas a conventional mortgage lender may not.
If you can't swing a 20% down payment on the home you want to buy, consider adjusting your expectations and look for a less expensive property instead. That could mean compromising on things like updates and square footage, but it could also mean purchasing a home this year, while mortgage rates are low. Use this mortgage calculator to work out what you might be able to afford.
Say you're looking at buying a $350,000 home but only have $35,000 saved to put down. If you're willing to go for a $175,000 starter home instead, you'll have enough for that 20% down payment.
Settling for a less expensive home or starter house may not work for you. Perhaps you need the extra square footage to accommodate your family. Or you might need to buy in a specific neighborhood to ensure you land in a certain school district or live within a reasonable commuting distance to your job. If that's the case, you may need to delay your home purchase and boost your income with a second job. You can then attempt to buy in a year or so (or beyond, depending on how much money you need to save).
Now, you may be thinking -- but what about those low mortgage rates everyone wants? Will they still be around in a year? The answer is: probably. Rates may climb modestly over the next 12 months, but we can still expect them to stay low for years as the U.S. economy attempts to dig out of its hole. Granted, you may get stuck with a slightly higher rate a year from now. But if you're talking about the difference between a 2.7% mortgage rate and a 2.9% rate, the latter is nothing to scoff at, as it's still extremely competitive.
Lacking a 20% down payment for a home doesn't have to be a deal-breaker. You may need to be flexible in your approach to home buying, but you do have choices.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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