Do you really need 20% of your own money to put down on a house? Of course not. Yet that myth and several others continue to keep many would-be homeowners on the sidelines in one of the most favorable mortgage rate environments in decades. Here’s the truth:
You can always put down as much as you like and the more you do, the lower your monthly house payment will be. But the truth is, the median downpayment over the 30-year period ending in 2018 was just 13%, according to the National Association of Realtors.
And that’s for all buyers, including move-up or move-down buyers who presumably could have used the equity from the sale of their current residence to bring a lot more dough to the table. First-time buyers alone made a median downpayment of a mere 7% and if you wait until you accumulate enough cash to put 20% down, it could take years before you can buy.
Downpayment assistance is available for single-family houses, townhouses, and condominium apartments. Most programs will offer help and include grants, which need not be repaid, along with no-interest or low-interest second mortgages that are either deferred or forgiven completely. Some are aimed specifically at veterans, first responders, educators, and persons with disabilities or other special needs. And in many cases, the programs can be combined with each other and used with all types of loans, including those backed by Uncle Sam.
According to Down Payment Resource, an outfit that keeps tabs on the various programs, nearly 87% of the 2,500 platforms nationwide have funds available right now. But, a study by the Urban Institute found that three-quarters all buyers don’t know about them. Had they known about these funds, more than a third of all buyers would have qualified for $9,200 in assistance.
Credit Scores and Building Credit
Credit scores are snapshots in time that show how you use credit, and they are the holy grail of housing finance. The higher your score, the more likely you are approved for a home loan and possibly a lower rate interest rate. One key factor that goes into your credit score is how you pay your bills while another is how you use the credit available to you. So don’t be late and use no more than 30% of your available credit.
But you don’t need a credit score in the 700s, or even the 600s, to have your loan application accepted. Truth is, you can qualify for financing if your score is as low as 580. Based on scores for about 1 million members of credit reporting company TransUnion, the average ranged from 662, depending on location. But, the lowest the government will go on a Federal Housing Administration-insured loan with just 3.5% down is 580.
A good credit score is considered to be between 670 and 739 with a top score at 850. Mortgage applicants with a score below 620 are considered high-risk and might have trouble qualifying; however, some loan programs will take borrowers with lower scores if they are willing to pay a somewhat higher interest rate or make a larger downpayment.
Your real estate agent may recommend a lender, or you might already have one, but don’t limit yourself. Truth is, all lenders are not the same and it can pay to browse.
A recent LendingTree survey found that folks who shopped around found a rate of 1.02 percentage points lower than those who didn’t. On a $300,000, 30-year loan, that translates to a $48,364 savings in interest fees over the loan’s full term. You also can save $2,000 or more in the fees lenders charge, like appraisals, notaries, origination fees and the like, so be sure to shop around.
There are a number of other widely-held old home myths that trample potential buyers into non-action or indecisiveness. So the best thing you can do is find an independent housing counselor who can answer all your questions and offer sound advice. Counseling agencies can be found throughout the country and can provide advice on buying or renting a home, defaults, foreclosures, and credit issues. You are able to search reputable counseling agencies that are approved by the Department of Housing and Urban Development to assist you on your hunt.