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No, you don't need a 20% down payment to buy a house
Lack of inventory has made for a highly competitive housing market this year, which in turn has pushed home prices up.
According to the U.S. Census Bureau, the average home price in February 2017 was $390,400. This compares to $355,300 in January 2017 and $349,400 in February 2016. Rising home prices makes it difficult for homebuyers to make a sizeable down payment and encourages bidding wars that increase the price tag even more.
It's generally said that a 20% down payment is typical or at least wanted by most sellers and real estate agents. According to a recent Redfin survey, 35.7% of real estate agent respondents said a 20% down payment is generally associated with a successful bid on a home.
With the average price at $390,400, a 20% down payment would be $78,080 - more than many homebuyers have saved up. As such, many are forced to make smaller down payments.
However, Redfin's study found that this might not be as big a detriment as one might think. Nearly one-fourth of respondents said down payments of between 3% and 5% seem to have a good chance at success. In fact, there are many ways to seal the deal on a home without putting up your entire life savings.
Make a connection
Many successful bids come from people who have established a connection with the seller. This doesn't mean they're best friends or even that they know each other. One Chicago area agent, Rano Khudayberdieva, told Redfin that writing a cover letter can greatly improve a prospective buyer's chances of getting a bid accepted.
"Writing a cover letter can improve a buyer's chances of getting a bid accepted."
"You'd rather have a committed buyer who put a little less down than a buyer with 20% down who may back out," Khudayberdieva explained.
Another Chicago area agent, Tim Zielonka, said a buyer who bonded with a seller over a common interest was able to beat out his competitors who made larger down-payment offers.
"I recently had an FHA-backed offer with 3.5% down beat out four other offers, each of which had conventional 20% down loans," Zielonka said. "The sellers were at the showing. I introduced them to the buyers and pointed out that both were huge enthusiasts of both vintage bicycles and classic cars, which put them at ease with one another and enabled them to form a natural connection. Had they not discovered this shared interest, my clients may not have gotten the property."
Explore other loan options
A conventional mortgage requires the buyer either make a 20% down payment or purchase private mortgage insurance, which could potentially add thousands to a home loan. There are, however, other loan products that allow for a smaller down payment without a PMI obligation - as long as you qualify.
If you or your spouse has served in the armed forces, you may qualify for a VA loan. These loans offer very low rates, plus don't require a down payment at all, as long as the sales price of the home is less than the appraised value, according to the U.S. Department of Veteran Affairs.
The Federal Housing Authority has a loan program to encourage first-time homebuyers find a house they can afford while also reducing risks for lenders. Under the FHA program, a buyer can put as little as 3.5% down - as long as their credit score is 580 or higher. But if you've got a not-so-impressive score, don't worry. You can still put as low as 10% down on a home under the FHA program.
In an effort to aid low- and moderate-income families living outside major metropolises obtain adequate housing, the U.S. Department of Agriculture offers a loan program in rural areas. Though it's often called a "rural home loan," it's actually available in the majority of the U.S., though not in very large cities. Like the VA loan, a down payment isn't required for USDA loans.
Seek out down payment assistance
Down payment assistance programs are available to many homebuyers, regardless of whether they've purchased a home before or not. According to research conducted by Urban Institute, these programs have aided in the purchase of many homes across the U.S., largely without risk to the lender or increased fees to the borrower. Every program is different, but many offer to pay a portion of your down payment or closing costs for you.
Though paying PMI can add to the cost of the mortgage, there are situations where purchasing this insurance product is actually your most cost-effective option. For example, if you have an excellent credit score, your lender may give you a generously low PMI rate. Additionally, you'll be able to cancel your PMI once you've paid off 22% of the home price or more. If you know you can reach this goal fairly quickly, it might be worth paying the PMI for a few months and cancelling it as soon as you can.
Coming up with the funds for a down payment is often one of the most difficult hurdles of making a home purchase. Luckily, consumers have myriad options for clearing this obstacle and carrying on with their homebuying journey.
3 smart solutions for a low credit score
When it's time to buy a home, one of the first things you'll likely look into is your credit score. This three-digit number gives lenders a hint as to how likely you are to pay your bills completely and on time.
A higher score means you're viewed as financially responsible to your lender. You could be rewarded with access to certain types of loans, such as jumbo mortgages, or with lower interest rates, resulting in a less expensive home loan in the long term.
A lower score means you could be a riskier borrower - perhaps you've been late on payments in the past, or maybe you already have a good amount of debt you still have to pay off. As such, a lender may either disqualify you from certain loan products or charge you a higher interest rate.
It's important to note that consumers who have lower scores (or even no scores at all) still have options when it comes to securing a mortgage. For example, people with scores as low as 500 can qualify for an FHA loan, according to FHA Handbook.
That said, having a higher score can open the door to more opportunities - both in terms of conventional mortgage products as well as other financial goals, like getting a new credit card or auto loan. If you've recently checked your credit score and aren't impressed with the results, there are some actions you can take to improve your standing. Follow these tips to begin improving your credit score:
Fix mistakes in your credit report
Like any other company, the credit bureaus are prone to human error. With hundreds of millions of adults in the U.S., it's not unheard of for information to be added to the wrong report - if you've ever done a Google search on yourself, you probably know there's someone else out there who shares your name, or at least something close to it.
The first step in any credit repair strategy should be to pull your credit report and look for errors. Identity errors, like listing another Jane Smith's account on your report, are among the most common. Others include accounts listed as open when they've been closed and accounts with the wrong credit limit after it's been increased.
Report mistakes like these right away. Then double-check that the mistake was fixed. According to the Consumer Financial Protection Bureau, reported mistakes that are reinserted in your report represent another commonly reported problem.
Never miss a payment
Payment history, including whether payments are made on time and in the correct amount, is the most important factor in your credit score. If you're prone to late payments and you have a lower score, this is probably why.
Create a plan to help you get on track with timely bill payments. A few tried-and-true tactics include:
- Set up auto-pay through your bank - just make sure you'll always have enough cash in your account to make the payment.
- Create calendar events in your phone to remind you to pay your bill before it's due.
- Sign up for text message alerts to remind you to pay your bill before it's due.
If you have a long history of missed or late payments, it may take some time to repair the damage. However, remedying this bad habit as soon as possible will put you on the right path to bringing up your score.
Decrease your credit utilization rate
If you have a credit card, you have a maximum spending limit. This is the amount you can put on your card before it's declined. But that doesn't mean you should put that much on your card or anywhere close to it. In fact, you should aim for a credit utilization rate of 30 percent. This means that you should only ever have a balance of 30 percent of your maximum credit limit.
If you have more than a 30 percent credit utilization rate, focus on paying it down to at least that much. If you have a wallet full of maxed-out cards, paying off all the balances could improve your score by as much as 100 points in one month, NerdWallet reported. While this is clearly the best-case scenario, it just goes to show how important credit utilization is to your overall score.
Are credit score concerns holding you back from pursuing your dreams of homeownership? Don't let that number get in your way. Reach out to your mortgage lender to talk about your options - you might have more than you realize!
Academy Mortgage is one of the top independent purchase lenders in the country as ranked in the 2016 CoreLogic Marketrac Report. Visit www.academymortgage.com to find a loan, get a rate, or calculate your payment today.