Alternatives to a 20 Percent Down Payment

If you’re putting off homebuying because you’re saving for a down payment, you should consider these financing options that require little or no money down. Depending on your situation, it may be better for you to buy a home and begin building equity rather than continuing to pay rent. There are many mortgage loan products to consider, including a conventional mortgage with or without private mortgage insurance (PMI), an FHA mortgage, or a 100 percent financed mortgage.

A Conventional Mortgage + PMI

One of the most common mortgage options is a conventional mortgage, often a 30-year term. With less than 20 percent down, you will pay PMI, but often that is not a bad idea. A conventional mortgage can be obtained with as little as three percent down. Keep in mind, the three percent down program does have income limits plus a few additional limitations. If you don’t meet requirements for the three percent down payment, you may need to provide a five percent down payment.

The way PMI is calculated has changed over the past several years. One big change is risk-based premiums, which means the amount of PMI you pay is based on your overall credit profile. PMI can be paid one of two ways: monthly or in a one-time premium. The one-time payment will require more funds to close on the loan but will reduce your monthly payments.

An FHA Mortgage

Obtaining an FHA mortgage is another way to purchase a home with only three and a half percent down. Often this option is best for those who have lower credit scores or have a limit on new credit, which may be causing the lower scores. PMI on an FHA mortgage will likely be higher, but the interest rate is often lower.

A Shorter Term Mortgage

A good way to avoid paying a down payment at all is to obtain 100 percent financing. If you are interested in 100 percent financing, you should ask about a Bankers Trust 15- or 20-year mortgage. These mortgages do not require a down payment or PMI; however, because they are amortized on a shorter term, they do require higher monthly payments compared to a conventional, 30-year mortgage.

One big advantage to shorter-term mortgages is that you pay less total interest over the course of your entire mortgage length. This is because, although your interest rate is comparable to that of a conventional mortgage interest rate, you have fewer total payments and fewer total interest charges.

If you are able to make higher monthly payments, a shorter-term mortgage may be your most financially efficient mortgage option.

In many parts of the country, homebuying is much more financially efficient than renting, and you don’t always need a 20 percent down payment. You should contact a mortgage loan originator who will review your complete credit profile along with your home buying goals to help you determine the best mortgage type for your individual situation.