Knowledge is power, and it’s never been truer for the mortgage process. There are plenty of myths surrounding down payments that keep potential homebuyers from entering the market. Let’s set the record straight.
MYTH: You need a 20% down payment.
This myth can stop a buyer dead in their tracks, but the good news is it isn’t true. In fact, Conventional programs for qualified buyers start at 3% down, FHA loans can require as little as 3.5% down, and other government-backed programs like VA and USDA loans do not require any down payment.
MYTH: Your down payment must come from your personal bank account.
Down payments do not have to come from your own savings. Many buyers look to family members for a gifting opportunity, which is an acceptable source of funds on many owner-occupied real estate transactions. There are also Down Payment Assistance (DPA) programs to help with the down payment by providing a grant or second lien to help cover costs. In some cases, the second lien is forgivable.
MYTH: Down Payment Assistance (DPA) programs are only for first-time homebuyers.
Financial experts report that a good number of inquiries involve customers worried that assistance programs are only designed for low-income borrowers. This myth is also false. Many local communities offer such programs to attract residents to their city. Your Loan Officer can help determine which programs you may qualify for.
MYTH: Your down payment covers the closing costs.
When potential homebuyers consider costs, the first thing that often comes to mind is the down payment. The down payment is often the largest out-of-pocket expense of a purchase transaction, but it’s not the only one to consider. Closing costs are part of any real estate transaction involving a mortgage. These fees cover costs incurred by the lender in exchange for originating and processing your loan, like appraisal, title search and transfer fees, insurance premiums, and property taxes.
MYTH: You shouldn’t put more than 20% down.
Maybe you have been an eager saver and could put more than 20% down on your home purchase. Odds are that a well-intentioned friend will advise you to only put 20% down and not a dollar more. You’re already avoiding PMI with 20%, so why put more down? A higher down payment has its advantages, including acquiring a lower interest rate. Plus, the more you pay upfront, the less you’re borrowing, which means lower mortgage payments and less interest over the course of the loan. Compare your options to see if it makes more sense to pay the extra down.
In the mortgage landscape, numerous myths and misconceptions surround down payments. Knowing your options and understanding your financial situation are crucial in determining the right down payment strategy for you. A knowledgeable Loan Officer can be your guiding light through this process. Feel free to contact me to discuss your homeownership goals.
This article was written by Donnie Robin.
Donnie Robin
Loan Officer, NMLS #1062202
612.751.5653
Donnie(at)DonnieRobin(dotted)com