There’s nothing worse than finding a great deal on a house, but not being able to come up with a large enough down payment. However..this is where so many prospective homebuyers get confused. Putting 20% down on a home is a general rule of thumb..not necessarily a requirement. In fact, people only use this rule in order to avoid paying a monthly private mortgage insurance (commonly referred to as PMI). PMI is an added monthly fee to the mortgage that you must pay if you do not put down the full twenty percent down on a home.
Many people that it would be irresponsible to buy a house without putting down 20% for the down payment. Sometimes, the opposite is true. If you have enough money in your savings to put down that amount on the house, but will have absolutely no money left over for anything else, that is actually irresponsible.
When you deplete your life savings to buy a house, you’re running the inevitable risk of becoming “house poor.” This is when you are able to afford your home, but not able to do anything else. For example, if your car breaks you can’t fix it. If you want to go on vacation, you can’t. If you want to go to a concert next month, you can’t. That’s not a way to live.
It is actually wiser to put less money down on the home, pay private mortgage insurance, and leave some money in your savings, rather than empty the bank. Here are a couple of alternative mortgage routes you can go besides the conventional mortgage.
A VA loan is a veteran/military loan available to military member sand their respective spouses. A few great things about this type of loan are that you cannot be immediately denied based on bad credit history, and you also are not required to pay PMI.
A USDA loan is a loan that is aimed toward homebuyers earning lower incomes. It is often referred to as a rural housing loan. A great advantage to this type of loan is that you can include repairs in the loan term amount.
An FHA loan is a government loan, generally granted to people with low credit who have probably gone through bankruptcy or foreclosure. This type of loan is usually directed at people who have gone through life changes which disrupted their credit histories, and have had to work their way back up. A perk of this type of loan is that the down payment requirement is 3.5%.
So you see, there are loan options out there for people who are wanting to buy a house but don’t have the 20% down payment. While the prospect of buying a home is exciting, just be sure that you can fully afford to own a home before going through the process.