The thought of coming up with a down payment is nerve-wracking for many would-be homebuyers. Some people think they absolutely must have at least 20 percent down to purchase a home. If they don’t have anything close to this amount in savings, they give up on their dream of ownership.
This doesn’t have to be the case, however. Despite what you may have heard, a 20 percent down payment isn’t written in stone. There are several other options you can consider. (See also: 5 Ways to Qualify for a Mortgage With a Small Down Payment)
1. Get an FHA mortgage
FHA mortgages are insured by the Federal Housing Administration. A common misconception is that this loan is specifically for first-time homebuyers, but the truth is anyone can apply — even repeat borrowers. And the best part? FHA loans only require a down payment of 3.5 percent with a minimum credit score of 580. If your credit score is below 580, your lender will require a 10 percent down payment — still much less than the traditional 20 percent down. Just keep in mind that you’ll have to go to an FHA-approved lender to qualify, and not all FHA-approved lenders will offer the same interest rate.
There are some additional costs with an FHA loan. First, you’ll pay an upfront premium of 1.75 percent of your total mortgage loan. Second, you’ll pay mortgage insurance premiums, or MIP, for the life of the loan. With a conventional loan, mortgage insurance is temporary and the payments typically stop once you build your home equity to 20 percent. With an FHA loan, however, that’s not the case. To drop mortgage insurance with these loans, you’ll need to refinance once the property has sufficient equity. (See also: Is an FHA Home Loan Right for You?)
2. Apply for a conventional home loan
Like FHA mortgages, conventional home loans allow you to purchase a property with less than a 20 percent down payment. Standard conventional loans require a minimum down…