How to buy a house without putting down 20%

Guess what?!…

You don’t actually need a 20% down payment to buy a house.

We dove into some of the differences between conventional loans with a 20% down payment and FHA loans with a 3.5% down payment, guiding you through their differences to help you make an informed decision.

Is 3.5% Enough for a Down Payment?

A 3.5% down payment, the hallmark of FHA loans, makes homeownership more accessible, especially for first-time buyers. 

However, it’s important to consider the long-term costs. 

A smaller down payment often means larger monthly payments and mandatory mortgage insurance premiums, which can add significantly to the overall cost of the loan.

Why Do Sellers Prefer Conventional Over FHA?

Sellers often lean towards buyers with conventional loans for several reasons. 

  1. Conventional loans are perceived as less risky and more likely to close without issues. 
  2. FHA loans, with their stricter appraisal requirements and potential for delays, can be seen as more cumbersome. 

This preference can be a crucial factor in competitive housing markets.

The Cons of a 20% Down Payment

Opting for a 20% down payment on a conventional loan reduces the loan amount and eliminates the need for private mortgage insurance (PMI). 

However, a smaller down payment allows you to maintain financial flexibility, allowing for investment in other areas or keeping funds available for emergencies. 

In markets where home values are rapidly appreciating, getting into the market sooner with a smaller down payment could be more advantageous than waiting to save 20%.

Interest Rates

Interest rates for conventional loans are generally influenced by the borrower’s credit score and down payment. 

FHA loans often have lower interest rates, but this advantage can be offset by their mandatory mortgage insurance costs.

Mortgage Insurance

Conventional loans waive PMI with a 20% down payment.

FHA loans require both upfront and annual mortgage insurance premiums

adding to the loan’s cost regardless of the down payment size.

Credit Score Requirements

Conventional loans typically require a higher credit score, usually around 620 or above. 

FHA loans are more lenient, accepting lower credit scores (as low as 500 in some cases), but better scores (580+) are needed to qualify for the minimum down payment.

 

Loan Limits

Conventional loans have higher loan limits, which vary by location and are adjusted annually. 

FHA loans, on the other hand, have lower maximum loan limits, which can restrict buying power in high-cost areas.

Property Standards and Appraisal Requirements

FHA loans have strict property standards and appraisal requirements, focusing on safety and security. 

Conventional loans are less strict, offering more flexibility in property choice, especially for homes that need renovation.

Refinancing Options

Both loan types offer refinancing opportunities. 

Conventional loans can sometimes be refinanced without an appraisal.

FHA loans offer a streamlined refinancing process, which is simpler and requires less documentation but still includes mortgage insurance.

Deciding between a conventional loan with a 20% down payment and an FHA loan with a 3.5% down payment hinges on your financial situation, credit score, and long-term goals.

It’s essential to weigh the pros and cons of each option carefully.

Consulting with a financial advisor or mortgage specialist can provide personalized guidance tailored to your unique circumstances, ensuring you make the best decision for your financial future.

 

Related Resources

For further insights into the housing market and its impact on your decision-making, explore these articles from Real Market:

– [Renting vs. Buying in the Current Market]: A comprehensive look at the current dynamics of renting versus buying.

– [Choosing the Right Real Estate Agent Matters]: Understand why the right agent is crucial in navigating the complexities of home financing and purchasing.

 
a couple hugging after moving into new home while holding the keys in their hands

The views and advice presented are a culmination of expert opinions and insights from the field of real estate. Readers are encouraged to use this as a guide but should also conduct their own due diligence when making decisions related to renting vs. buying.


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